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Unit 24 - Demand For FOP

Firms employ factors of production based on the type of product and factor costs and productivity. When factors substitute or complement each other, changes in one factor's price or productivity can affect the use of other factors. In the short run, firms can more easily change the quantity of labor but find it difficult to alter other fixed factors like land. Firms seek to combine factors at the highest productivity level. Demand for capital goods depends on prices, profits, taxes, interest rates, technology, and confidence levels. Demand for land relates to productivity, with more fertile or central land commanding higher prices. An economy's industrial structure influences its use of factors of production.

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40 views2 pages

Unit 24 - Demand For FOP

Firms employ factors of production based on the type of product and factor costs and productivity. When factors substitute or complement each other, changes in one factor's price or productivity can affect the use of other factors. In the short run, firms can more easily change the quantity of labor but find it difficult to alter other fixed factors like land. Firms seek to combine factors at the highest productivity level. Demand for capital goods depends on prices, profits, taxes, interest rates, technology, and confidence levels. Demand for land relates to productivity, with more fertile or central land commanding higher prices. An economy's industrial structure influences its use of factors of production.

Uploaded by

Raiaana Salahuddin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Section IV : Unit 24 - Demand For Factors Of Production

What Factors Of Production Are Employed?

The type of factors of production employed depends on the type of product produced, the
productivity of the factors and their cost. For instance, a car firm is likely to be capital intensive
whereas a beauty salon is likely to be labour intensive.

When factors of production are substitutes, a rise in the productivity/fall in the cost may result in a
change in the resources being employed. E.g : Fall in the price of capital goods may lead to
replacement of workers with machines.

When factors of production are complements, a fall in price of one/rise in its productivity may
increase the employment of all factors in a firm. E.g : Fall in price of an aircraft may make it
possible for an airline to fly to more destinations, hence it’ll employ more pilots & cabin crew +
more take off and landing slots at airports.

Altering Factors Of Production :

Firms may find it difficult to change the quantity of resources employed by it for some factors and
easy for others. In the short run, there exists at least one fixed factor of production meaning that its
quantity can’t be altered quickly. For instance, expansion of factory size (land) will take time for a
firm to conduct. Moreover, one willing to reduce output will be unable to stop paying rent or sell of
its buildings swiftly.

In contrast, quantity of labour can be easily changed even in the short run by reducing overtime
payment. Changing orders for raw materials & capital equipment is also possible but it depends on
the length of contracts, indication of increasing demand and availability of spare capacity of a firm.

Combining The Factors Of Production :

Achieving the right combination of factors of production is crucial. For instance, a hairdressing
salon cannot have ten hair dryers and only two hairdressers because it would mean that labour is
being under-utilised. Firms must seek to achieve the highest possible productivity while combining
resources. E.g : Total output = 770 and number of machines are 5 then amount of workers
employed should be 7 as it will given us the highest output per worker which is 110 (Refer to page
241 for table + detailed explanation)

Factors Influencing Demand For Capital Goods :

Demand for capital goods is influenced by : price of capital goods, price of other factors of
production, profit levels, corporation tax, income, interest rates, confidence levels and
advances in technology.

• Price of capital goods : Rise in price of capital goods ——> contraction in demand.
• Price of other FOP : Increase in price of other FOP (especially labour) ——> increase demand of
capital goods. This will occur mainly if factors are substitutes & rise in price of another FOP
makes production per unit of output more expensive than increasing capital equipment. If the
factor is a complement, a rise in its price will decrease demand for capital.
• Profit Level : Higher profit ——> Higher ability & incentive to buy capital goods.
• Corporation Tax : Cut in corporation tax ——> firms have more profit to reinvest in the business
and have higher incentive to do so.
• Income : Increased real disposable income ——> increased consumption as a result firms will be
more encouraged to invest as they will expect higher sales in the future.
• Interest Rates : Cut in interest rates ——> Raises consumption, encourages firms to expand
their capacity and increases investment as firms will have lower opportunity cost of investing and
decreased cost of borrowing. Firms can use profit to buy capital goods instead of depositing it in
bank accounts. Borrowing to buy capital goods would also be less costly.
• Confidence : If firms are confident that sales will rise, they will invest. If they’re pessimistic there
will be a decline in investment.
• Advances in Technology : Advances in technology will increase productivity of capital goods. If
more efficient machinery is developed,firms are likely to invest more.

Demand For Land :

Productivity is a key factor influencing demand for land. For instance, the most fertile land will have
the highest demand and rent for agriculture. City centre sites are also productive as they increase
firms’ potential to attract a high number of customers. E.g : retail firms are likely to compete for a
vacant shop in Times Square, NY. High number of competitors will push up the rent.

Water is a natural resource which is experiencing increasing world demand as it can be used for
domestic,agricultural,industrial and energy production purposes.

Factors Of Production and Sectors Of Production :

The factors of production used in an economy is influenced by its industrial structure. Demand for
FOP alters as an economy’s industrial structure changes. For instance, China currently uses most
of its resources in the secondary sector as it is the main engine of economic growth there.

Different industries use different factors of production. E.g : The chemical industry is very capital
intensive.

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