Influences On The Demand For Factors of Production
- The demand by firms for factors of production (FoP) is influenced by three factors
- The demand for goods/services
- The price of different factors of production
- The availability & productivity of the factors
1. The Demand for Goods/Services
- The demand for the factors of production is a derived demand. If a tyre manufacturer benefits from increased demand for their tyres, they will require more rubber to meet the demand
- They may also require more labour
- Depending on the level of increased demand, possibly more capital (machinery) to manufacture the tyres
The demand for rubber is derived demand from the demand for tyres
- In the tyre market, the increased demand for tyres is represented by a shift in the demand curve from D1 to D2
- Rubber is a natural resource (land) & there is now increased demand from the firm for rubber in order to meet higher levels of tyre production
- The diagram on the right represents the rubber market where demand for it increases from D1 to D2
2. The Price For Different Factors Of Production
- The price of alternative factors of production are constantly monitored by firms in order to ensure that they are maximising profits
- The price of alternative (substitute) raw materials will be considered e.g. using fish leather instead of cow leather to manufacture jackets
- The price of installing new & efficient machinery (capital) will be monitored against the cost of hiring more workers (labour)
3. The Availability & Productivity Of The Factors
- The availability of the factors of production can change rapidly in factor markets
- Covid 19 caused many supply issues which reduced the availability of labour & many raw materials
- Many firms responded by searching for substitute factors of production so that they could continue producing goods/services
- In some cases this meant switching demand from cheaper foreign imports to more expensive locally produced raw materials
- If the productivity of a factor is high (or increasing), then the demand for that factor will also increase
- If a new Government training scheme improves the productivity of car mechanics, car repair garages will seek to employ more workers as each worker is able to achieve more resulting in higher profits
Exam Tip
Firms are able to increase their profits in two main ways.
Firstly, they can raise the selling price so that the gap between the selling price & their costs of production increases (the effectiveness of this depends on the price elasticity of demand).
Secondly, they can decrease the cost of their factors of production & maintain the current selling price.
Following the second option can have significant impacts on the product manufactured by the firm e.g. switching to a cheaper natural resource may decrease product quality or decreasing the wages paid to workers may reduce motivation leading to poor productivity.
