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 production 

 is where more labours 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 personalized, 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: labours 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-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 labours 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 labours 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
 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).

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 labours. Each labour
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.