Chapter 21: Firms and production

Question 1

Demand for factors of production

Answer 1

• What factors of production are employed
• Altering factors of production
• Combining the factors of production

Question 2

Factors influencing demand for capital goods

Answer 2

Among the key factors influencing demand for capital goods are the price of capital goods, price of other factors of production, profit levels, corporation tax, income, interest rates, confidence levels and advances in technology.

Question 3

Demand for land

Answer 3

Productivity is a key factor influencing demand for land. In terms of agricultural land, the most fertile land will be in highest demand and receive the highest rent. City centre sites are also very productive as firms have the potential to attract a high number of customers. If a shop in the centre of New York becomes vacant, it is likely that a number of retail firms would compete for it in the expectation that they could earn a high revenue there. The competition pushes up the rent that can be charged for a favourable site.

One natural resource, which is experiencing an increasing world demand, is water. Water is used for domestic, agricultural, industrial and energy production purposes. As countries become richer, they make heavier demands on scarce water supplies. The global use of water has increased six times in the last one hundred years and is predicted to double again by

Question 4

Factors of production and sectors of production

Answer 4

Diff erent industries make use of diff erent factors of production. The chemical industry, for example, is very capital-intensive and agriculture is land-intensive (along with being water-intensive).

Question 5

Labour intensive production

Answer 5

• There is a large supply of labour in the country, making labour relatively cheap
• Some producers may be too small to take advantage of capital equipment.
• Consumers may think that handmade products are of a higher quality and more likely to meet their individual needs than mass produced products. This may make consumers willing to pay a higher price for them
• Custom-made products can also provide greater status and some consumers like the personalised attention that labour-intensive production may make possible.

Question 6

Capital intensive production

Answer 6

• Workers can be more flexible in terms of what they do and the size of the labour force can be adjusted by small amounts.
• Labour can also provide feedback on how to improve production methods and the quality of products.
• Firms may switch from capital-intensive production to labour-intensive production if the price of capital increases and labour can carry out the same functions with the same level of productivity as the machines they replace.
• As well as oft en having the capacity to produce more products at a lower average cost (technical economies), capital goods produce products of a uniform standard unaffected by human error. They do not engage in industrial action. They also do not have time off ill and are not affected by tiredness, although they do need to be maintained and can break down.

Question 7

Production

Answer 7

Process of turning factor inputs into output