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Chapter 21 - Firms & Production - IGCSE/O Level

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Published in: Economics
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Mostly graphical summary of Chapter 21 - Firms & Production of the CIE IGCSE & O Level coursebook.

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  1. FIRHS & PRODUCTION CHAPTER 21 'Ill
  2. Learning Objectives Demand for factors of production analyse the influences on the demand for factors of production Labour— vs capital intensive • analyse the reasons for adopting labour-intensive production or capital-intensive production Productivity vs production • distinguish between productivity and production
  3. WHAT DETERMINES WHAT FACTOR OF PRODUCTION IS ENPLOYED? TYPE OF PRODUCT manufacturing activities are capital-intensive (e.g. sugar factory) while service-based activities are typically labour intensive (e.g. a school) WHEN FACTORS ARE SUBSTITUTES PRODUCTIVITY OF FACTORS if machines are more effective than labour at performing a specific task, production will be capital- intensive COST OF FACTORS if is cheaper to utilise machines than to employ labour , production will be capital-intensive, if labour and capital are substitutable a rise in the productivity or cost of a factor of production will cause a shift towards that factor of production WHEN FACTORS ARE COMPLEMENTS a rise in the productivity or cost of a factor of production will cause an increase in the employment of all factors of production
  4. ALTERING FACTORS OF PRODUCTION when is it possible? TYPE & NATURE OF FACTOR some types of labour (i.e, delivery packers) are easy to replace with capital; but a piece of land can't easily be expanded to increase production TINE-PERIOD in the long-run, every factor is substitutable, but in the short-run, not much can be altered, as such changes take time most firms use a combination of labour and capital, and the challenge lies in striking the perfect balance that yields the highest productivity at the lowest possible cost • care must be taken to not over- or underuse a factor of production in relation to another (e.g. have enough engineers to work all of the available machines, not too many, not too few)
  5. FACTORS INFLUENCING DENAND FOR CAPITAL Cost As price of capital rises, demand falls and more labour is used Interest BorrpåtE becomes cheaper for individuals and firms; consumption increases and firms can raise finances to fund capital more easily Corporation A tax cut will allow firms to and hence invest + in capital goods, amongst other things Profit levels When profit levels are high, firm has both incentive and financial means to Advances in tech These cause productivity of capital to increase, making it a + attractive prod factor disposable income When consumers enjoy higher incomes, they spend demand + goods and services, incentivising firms to invest in + capital to meet higher demand invest in capital future prospects If firms expect demand to rise in the future, they'll be + willing to invest in capital now
  6. FACTORS OF PRODUCTION AND SECTORS OF PRODUCTION • in the previous chapter, we introduced the idea that as economies develop, their many activities progress from the primary to the secondary and to the tertiary and tech sectors similarly, as economies develop, the structure of demand for any factor of production changes too: a progression to the secondary sector requires a capital-intensive approach, whereas a change to the tertiary one (services), may require a more labour-intensive one • note, however, that this may not always be the case (i.e. India) As economies develop: KNOWLEDGE/ICT PRIMARY SECONDARY TERTIARY Country/ Region Pakistan India China USA Hong Kong Primary % 21 17 8 0 Secondary % 20 30 41 19 7 Tertiary % 59 53 51 80 93
  7. Capital- intensive Labour- intensive Advantages higher output potential • can be cheaper than labour • allows small firms with less investments to participate in market • customers may appreciate hand- made items more Disadvantages quality of products may suffer • loss of important jobs prone to human error production could be heavily disrupted by labour shortages PRODUCTION VS PRODUCTIVITY production: amount produced. productivity: amount produced in relation to factors of production.
  8. You should know... The key factors that influence the factors of production employed are the type of products produced, the productivity of the factors and their cost. • In the short run, there is likely to be at least one fixed factor of production, most commonly capital. The average product of labour (productivity) is total output divided by the number of workers. Demand for capital goods is influenced by the price of capital goods, the price of other factors of production, profit levels, income, interest rates, confidence and advances in technology. City centre sites command a high rent because they are in high demand. The factors of production, used in an economy, are influenced by the economy's industrial structure. Capital-intensive production can result in higher output at a lower average cost, and avoids human error and disruptions caused by strikes, tiredness and sickness. Labour-intensive production may be appropriate where there is a high supply of low wage labour, personal attention is important, consumers want custom-made products and where workers' ideas can make significant improvements to production methods.

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