3.5. Firms and production
- Syllabus
- 0455–2027–2028
- Topic
- 3.5
- Level
- —
Learning objectives
3.5.1Demand for factors of production• influences to include demand for the product, the price of different factors of production, their availability and their productivity3.5.2Labour-intensive and capital-intensive production• reasons for adopting the different forms of production• advantages and disadvantages of the different forms of production3.5.3Production and productivity• the difference between production and productivity• influences on production and productivity• effects of changes in investment on productivity
Choose factors of production
A firm's demand for land, labour, capital and enterprise is derived demand: it wants factors because they help produce something customers want. The chosen combination depends on the product and on the relative usefulness and cost of each factor.
| Influence | Likely effect on demand for a factor | Why the result can differ |
|---|---|---|
| demand for the product | higher product demand usually raises demand for factors | the firm needs the factor only if it can expand output and sell it |
| prices of factors | demand tends to move towards a relatively cheaper substitute | factors may be complements, so cheaper machinery can also raise demand for workers who operate it |
| availability | scarce factors restrict how much the firm can use | training, finance or imports may improve availability over time |
| productivity | a more productive factor creates more output per unit and becomes more attractive | fewer units may be needed for a fixed output, so the effect on quantity demanded is not automatic |
If demand for bread rises, a bakery may demand more bakers and ovens. If ovens become cheaper and work well with trained bakers, demand for both capital and skilled labour can rise; if machines replace a repetitive task, demand may shift from routine labour towards capital.
A factor's low price alone does not make it the best choice. Compare relative price with productivity, availability and suitability for the product; also distinguish demand for a factor from its supply.
Choose labour- or capital-intensive production
Labour-intensive production uses a relatively high proportion of labour; capital-intensive production uses a relatively high proportion of machinery and equipment. The labels compare the input mix, not the firm's absolute number of workers or machines.
| Decision feature | Labour-intensive production | Capital-intensive production |
|---|---|---|
| favoured when | labour is available, relatively cheap or skilled; personal service, judgement, creativity or flexibility matters | capital is available and affordable; large, fast, standardised or continuous output matters |
| possible advantages | adaptable workers; individual service; lower initial capital spending; more employment | high and consistent output; greater labour productivity; fewer routine errors; long operating hours |
| possible disadvantages | recurring wages; illness, turnover or industrial action; variable quality; slower output | high purchase and maintenance cost; breakdown risk; obsolescence; less flexibility; possible job losses |
A restaurant may retain skilled chefs because variety and personal quality matter, while a food-processing plant may automate repetitive high-volume stages. A mixed method is common: machines provide speed and consistency while workers supervise, maintain and adapt the process.
Neither method is always cheaper or more productive. The choice depends on relative factor prices and productivity, the product, output scale, finance, reliability and how quickly conditions may change.
Separate production from productivity
Production is the total output made in a period. Productivity is output per unit of input in a period. Production can rise simply because a firm uses more inputs; productivity rises only when each unit of input produces more.
Productivity=outputproduced/quantityofinputused
A farm's harvest rises from 100 to 120 tonnes after labour rises from 10 to 12 workers: production rises, but output per worker stays at 10 tonnes. If 10 workers instead produce 120 tonnes, production rises and labour productivity rises to 12 tonnes per worker.
| Mainly changes production | Mainly changes productivity |
|---|---|
| product demand and the firm's planned output | education, training, experience and worker motivation |
| amount and availability of labour, land and capital | health, working conditions and organisation |
| weather or resource conditions, especially in primary production | quality of capital, technology, maintenance and specialisation |
Investment in suitable capital can give workers faster or more accurate equipment; investment in education and training can build the skills needed to use it. Productivity then rises through more or better output from each input. The gain may be delayed by installation and training, and weak if equipment is unsuitable, idle or poorly maintained.
Do not infer higher productivity from higher total output alone. State the input being measured—such as output per worker, labour hour or machine—and compare like periods and units.