Chapter 21- Firms and Production Flashcards
What factors of production are employed
influenced by the type of product produced, productivity of the factors and their costs. When factors are substitutes, a rise in productivity or a fall in cost of one of them may result in a change of the combination of resources being employed. Eg: a fall in the price of capital goods would make a firm replace labor with capital or change to more capital intensive production. On the other hand if the factors are complements, a fall in price or rise in productivity of one could result in the increased employment of all the factors.
Altering Factors of Production
in the short run there is likely to be at least one fixed factor of production. this means that its quantity cant be altered quickly. for eg: new factories or offices cant be built quickly and hence will take firms that desire expansion time to extend. In contrast labor can be changed much more easily even in the very short run by hiring more workers or increasing overtime available. Changing orders for raw materials and capital equipment is also possible in the short run but it depends on the length of contracts availability of spare capacity in firms producing them.
Combining factors of Production
it is important to achieve the right combination of the factors of production. There shouldn’t be any under utilization or redundant factors as this would cause unnecessary costs and reduce efficiency.
Factors influencing demand for capital goods
rise in price dec profit levels inc cut in corporation tax inc rising real disposable income inc cut in interest rates inc optimistic about future inc advances in technology inc
Demand for Land
Productivity is a key factor in influencing the demand for land. In agricultural land the most fertile land will have the highest demand and receive the highest rent. City center locations are also very productive as they have the potential to attract a lot of customers. These sites will have very high competition which would result in the rent being pushed up.
Factors of Production and Sectors of Production
The demand for factors of production can alter as an economy changes its industrial structure. Agricultural reform permits resources to move to low cost manufacturing then the resources move to higher value added manufacturing then the service sector finally becomes the most important one. This may have exceptions for eg: India’s service sector expanded before it built up a sizeable manufacturing sector. In most countries service sector makes the largest contribution to output.
labor Intensive or capital Intensive Production
Labor Intensive:
large supply of labor making it cheap
Producers unable to take advantage of capital equipment
Production of handmade shoes as they may fetch a higher price as some think they are of higher quality and would allow them to receive greater status in society
workers are more flexible in methods of production and items that can be produced
size of labor force can be adjusted by small amounts
workers can provide feedback
Capital Intensive:
advances in technology make capital goods more affordable and productive
Eg: online university degrees making education more capital intensive
capacity to produce more at lower average costs
produce uniform standard of products that are unaffected by human error
no industrial action or loss in productivity
Production and Productivity
output per worker hour increases and number of working hours stays the same, production will increase. if unemployment increases productivity will rise but production will fall as skilled workers are likely the only ones who are able to keep their jobs. When economies develop, both production and productivity tend to rise as a result of improvements in technology and education.
Corporation Tax
a tax on profits of a company
