3.

6 – Firms and Production

Demand for Factors of Production

Some factors that determine the demand of factors of production:

 The demand for the product: if more goods and services are demanded by consumers, more
factors of production will be demanded by firms to produce and satisfy the demand. That is, the
demand for factors of production is derived demand, as it is determined by the demand for the
goods and services (just like labour demand).

 The availability of factors: firms will also demand factors that are easily available and
accessible to them. If the firm is located in a region where there is a large pool of skilled labour,
it will demand more labour as opposed to capital.

 The price of factors: If labour is more expensive than capital, firms will demand more capital
(and vice versa), as they want to reduce costs and maximize profits.

 The productivity of factors: If labour is more productive than capital, then more labour is
demanded, and vice versa.

Labour-intensive and Capital-intensive production

Labour-intensive production is where more labourers are employed than other factors,
say capital. Production is mainly dependent on labour. It is usually adopted in small-
scale industries, especially those that produce personalised, handmade products.

Examples: hotels and restaurants.

Advantages:

 Flexibility: labour, unlike most machinery can be used flexibly to meet changing levels of
consumer demand, e.g., part-time workers.

 Personal services: labour can provide a personal touch to customer needs and wants.
 Personalised services: labourers can provide custom products for different customers.
Machinery is not flexible enough to provide tailored products for individual customers.

 Gives feedback: labour can give feedback that provides ideas for continuous improvements in
the firm.

 Essential: labour is essential in case of machine breakdowns. After all, machines are only as
good as the labour that builds, maintains and operates them..

Disadvantages:

 Relatively expensive: in the long-term, when compared to machinery, labour has higher per unit
costs due to lower levels of productivity.

 Inefficient and inconsistent: compared to machinery, labour is relatively less efficient and tends
to be inconsistent with their productivity, with various personal, psychological and physical
matters influencing their quantity and quality of work.

 Labour relation problems: firms will have to put up with labour demands and grievances. They
could stage an overtime ban or strike if their demands are not met.

Capital refers to the machinery, equipment, tools, buildings and vehicles used in
production. It also means the investment required to do production. Capital-intensive
production is where more capital is employed than other factors. It is a production which
requires a relatively high level of capital investment compared to the labour cost. Most
capital-intensive production is automated (example: car-manufacturing).

Advantages:

 Less likely to make errors: Machines, since they’re mechanically or digitally programmed to
do tasks, won’t make the mistakes that labourers will.

 More efficient: machinery doesn’t need breaks or holidays, has no demands and makes no
mistakes.

 Consistent: since they won’t have human problems and are programmed to repeat tasks, they are
very consistent in the output produced.

 Technical economies of scale: increased efficiency can reduce average costs

Disadvantages:

 Expensive: the initial costs of investment is high, as well as possible training costs.

 Lack of flexibility: machines need not be as flexible as labourers are to meet changes in
demand.
 Machinery lacks initiative: machines don’t have the intuitive or creative power that human
labour can provide the business, and improve production.

Production and Productivity

A firm combines scarce resources of land, labour and capital (inputs) to make (produce)
goods and services (output). Production is thus, the transformation of raw materials
(input) to finished or semi-finished goods and services (output).
In other words, production is the adding of value to inputs to create outputs. It is the
production that gives the inputs value.

Some factors that influence production:

 Demand for product: the more the demand from consumers, the more the production.

 Price and availability of factors of production: if factors of production are cheap and readily
available, there will be more production.

 Capital: the more capital that is available to producers, the more the investment in production.

 Profitability: the more profitable producing and selling a product is, the more the production of
the product will be.

 Government support: if governments give money in grants, subsidies, tax breaks and so on,
more production will take place in the economy.

Productivity measures the amount of output that can be produced from a given amount of
input over a period of time.

Productivity = Total output produced per period / Total input used per period

Productivity increases when:

 more output or revenue is produced from the same amount of resources

 the same output or revenue is produced using fewer resources.

(Labour productivity is the measure of the amount of output that can be produced by
each worker in a business).

Factors that influence productivity:

 Division of labour: division of labour is when tasks are divided among labourers. Each labourer
specializes in a particular task, and thus this will increase productivity.

 Skills and experience of labour force: a skilled and experienced workforce will be more
productive.

 Workers’ motivation: the more motivated the workforce is, the more productive they will be.
Better pay, working conditions, reasonable working hours etc. can improve productivity.

 Technology: more technology introduced into the production process will increase productivity.

 Quality of factors of production: replacing old machinery with new ones, preferably with latest
technologies, can increase efficiency and productivity. In the case of labour, training the
workforce will increase productivity.

 Investment: introducing new production processes which will reduce wastage, increase speed,
improve quality and raise output will raise productivity. This is known as lean production.