<3.6 FIRMS & PRODUCTION> 

This is clearly linked to the previous factor as availability is another term for quantity and as mentioned THE GREATER THE AVAILABILITY of the factor the LOWER THE COSTS tends to be.

• Finally we need to mention the quality of the factor, as if it was all about land size and large populations, "Why is it that countries such as IRELAND have such HIGH GDP?", "Why is it that rice isn't grown in the UK?"

• If your product requires higher-quality resources then they WILL BE IN MORE DEMAND AND WILL TEND TO DEMAND A HIGHER PRICE.

• For example, surgeons, pilots and barristers are in high demand due to their highly valued skills and qualifications. China, India, Vietnam and Thailand have good-quality land to grow rice, whereas Scandinavian countries do not have the natural climate to do so.

Q. "What do you think the most in demand factors are in Taiwan, in terms of relative prices?", "Why would a foreign firm wish to produce in Taiwan in particular?", "What factor is relatively cheap here?"

Whether firms choose more capital- or labour-intensive production methods depends on several related factors, some of which we talked about above:

Questions to help you decide:

• "Is the COST OF CAPITAL FALLING RELATIVE TO LABOUR?" "If so I might think about becoming more capital-intensive through automation"

• "Is the MARKET SIZE LARGE?", "if so it might make sense to become more capital intensive and buy large machines that are much more productive than labour, as it will be cheaper in the long run"

• "Are there any GOVERNMENT INCENTIVES?", "If the government gives use some incentives to employ more labour, such as tax cuts then we may be persuaded to be mor labour-intensive"

• etc....Can you think of any other reasons????

Q. "What would you consider your school to be, labour or capital intensive?"

• PRODUCTIVITY is a measure of HOW WELL RESOURCES ARE USED IN THE PRODUCTION PROCESS.

  • • • LABOUR PRODUCTIVITY measures the efficiency of the workforce in terms of OUTPUT PER WORKER. It can be improved by having a better-skilled workforce (through education and training) or by allowing workers to use better, more efficient technologies to increase their output.

      • CAPITAL PRODUCTIVITY measures how efficiently a business or economy uses its capital (like machines, tools, buildings, and equipment) to produce output. It is usually measured in OUTPUT PER $1 OF CAPITAL.

Higher productivity is important for an economy for several reasons:

• Economies of scale - Higher levels of output, whether through capital-intensive or labour-intensive methods of production, help to reduce unit costs of production. These cost-saving benefits can be passed on to consumers in the form of lower prices. 

• Higher profits - Productivity gains are a source of higher profits for firms. These efficiency gains can be reinvested in the business to fund research and development or used to expand the operations of the business. Either way, higher profits help to fund the long-term survival of the firm.

• Higher wages - Highly productive firms that enjoy cost savings and higher profitability can afford to pay higher wages to their workers, especially if they become more efficient. Such firms also tend to attract the best workers, as people prefer to work for firms with better prospects and profitability.

• Improved competitiveness - Productive firms can gain advantages beyond economies of scale. For example, they are more efficient, so they can compete more effectively on a global scale. Samsung's efficiency gains during the late 2000s ensured that the South Korean company took market share from Nokia and Apple to become the market leader in the smartphones industry.

• Economic growth - Productivity is a source of economic growth (Higher GDP) because it increases the productive capacity of an economy, thus shifting its production possibility curve outwards. This helps to raise employment and standards of living in the economy. Higher wages, from improved efficiency of firms and higher labour productivity, also mean that the government collects more tax revenues to fund its expenditure on the economy.

• Explain why many firms try to maximise profits. 4

• What is meant by an industry being ‘capital-intensive’? 2

• Explain two influences on the amount firms spend on capital goods. 4

• Define ‘productivity’. 2

• Explain two reasons why productivity may increase. 4

• Analyse how a fall in a firm’s revenue may influence its spending on capital goods. 6

• Define ‘capital-intensive’. 2

• Explain two reasons why a firm may change from labour-intensive to capital-intensive production. 4

• Explain two reasons why a firm may decide to use more labour and less capital in producing its products. 4

• Analyze the causes of an increase in labor productivity. 6

• What is meant by a labor-intensive industry? 2

• Identify two features of a capital-intensive production process.  2

• Explain the difference between productivity and production. 4

• Explain two reasons why productivity may fall. 4