Firms and production

Demand for factors of production

Factor of production - a resource used to produce goods and services: land, labour, capital or enterprise.

A firm demands a factor only because it contributes to production and revenue. The amount demanded depends on the benefit the factor adds compared with its cost.

Influence	Effect on factor demand
Demand for the final product	Higher product demand encourages more output, so firms usually demand more labour, capital and raw materials.
Price of the factor	A higher wage, rent or machine price raises production cost and usually reduces the quantity demanded of that factor.
Price of other factors	If machinery becomes cheaper relative to labour, a firm may substitute capital for workers; the reverse can also occur.
Availability	A factor cannot be used widely if skilled workers, land, finance or suitable machinery are unavailable.
Productivity	A productive factor creates more output and revenue, increasing the firm's willingness to employ it, although fewer units may sometimes produce the same output.

Labour-intensive and capital-intensive production

Labour-intensive production - production that uses a relatively high proportion of labour compared with capital.

Capital-intensive production - production that uses a relatively high proportion of machinery and equipment compared with labour.

Reason for choosing labour-intensive	Reason for choosing capital-intensive
Wages are low relative to machinery costs	Wages are high or machinery is relatively cheap
The service needs human judgement, care or personal contact	The product is standardised and can be automated
Demand is small or uncertain, so flexible labour is safer	Demand is large and stable enough to use expensive machinery fully
Finance, electricity, repairs or suitable machines are limited	Finance, technology, skilled technicians and infrastructure are available

Method	Possible advantages	Possible disadvantages
Labour-intensive	Flexible; lower initial capital cost; creates employment; human workers adapt and personalise service	Output may be slower or less consistent; training and supervision needed; wage costs continue
Capital-intensive	High output, speed and consistency; machines can operate for long hours; lower labour cost per unit	High purchase and maintenance cost; breakdowns halt output; technology can become obsolete; fewer jobs

Evaluation: The methods are not complete opposites. Most firms combine workers and capital, and new machinery may increase demand for technicians even while replacing routine jobs.

Production and productivity

Production - the total output of goods and services produced over a period of time.

Productivity - output produced per unit of input over a period of time.

Labour productivity - output per worker or per hour worked.

Formula: Labour productivity = total output / number of workers (or total hours worked)

Production can rise while productivity falls. If a factory raises output from 1000 to 1200 units by doubling its workforce from 10 to 20, production rises but output per worker falls from 100 to 60 units.

Influence	How it affects production or productivity
Quantity of resources	More workers, land, machinery or raw materials can increase total production.
Education and training	Workers make fewer mistakes, work faster and adapt to technology.
Technology and capital quality	Better equipment raises speed, precision and output per worker.
Management and organisation	Clear targets, efficient workflows and good communication reduce waste.
Motivation, health and working conditions	Healthy, motivated workers may be more careful, innovative and productive.
Infrastructure and reliability	Transport, power and digital systems prevent delays and interruptions.

Investment - spending by a firm on capital goods, such as machinery, buildings, technology or training, to increase future productive capacity.

Investment can raise productivity by giving workers better tools, automating routine tasks and reducing waste. It does not guarantee improvement: unsuitable technology, weak training, breakdowns or low demand may leave expensive equipment underused.