3.

6 FIRMS AND
PRODUCTION
 LEARNING OBJECTIVES
1. Distinguish between and explain the influences on production and
productivity.
2. Describe what determines the demand for factors of production
3. Explain why firm adopt different form of production Capital
intensive/ Labour intensive
4. Explain the advantages and disadvantages of labour-intensive and
capital-intensive production
5. Analyse what determines the demand for FOP, the relative prices,
and availability
PRODUCTION & PRODUCTIVITY
 What is meant by Productivity?

◦Productivity measures the amount of output (goods &

services) that can be produced from a given amount of
input (FOP - land, labour and capital resources).
◦If the firm becomes more productive, then it has become
more efficient, since productivity is an efficiency
measure.
Which firm is more productive? Why?
A

B
Productivity in dairy farming around the
world
 Productivity in an economy will increase if:

◦In general, productivity in a firm or entire

economy will have increased if more output or
revenue is produced from the same amount
of resources and the same output or revenue
can be produced using fewer resources.
 How Productivity measured?
◦
 Economies of scale

Higher profits Higher productivity Higher wages

is important for
an economy for
several reasons

Improved Economic growth

competitiveness
 How can firms improve or increase productivity?
Raising the skill level
of the workers
through training

Improving the motivation level Using more technologically

of the employees by rewarding advanced equipment in the
them bonuses or production process replacing the
performance-related payments old plant and machinery

Increasing job satisfaction Managing the available resource

such as improving working in a more efficient way such as
environment, regular feedback, to reduce waste, increase
involving team working in efficiency/speed, improve quality
decision making and raise output.
 What is production?
Production is a function of an
organization which is associated with
the conversion of range of inputs into
desired output (volume of output).
 Factor substitution in production of output
❑Involves replacing labour in a production process
with capital equipment
❑Technological advance lowered the cost of new
machinery and equipment and increased
productivity relative to labour.
The pictures below show two different methods of
production. Give three advantages and
disadvantages for both.
LABOUR INTENSIVE CAPITAL INTENSIVE
 Labour Intensive Pros & Cons
It is suitable for producing
products that are highly
customised (individualised)
Enables customers to receive a
personalised service.
Can be used flexibly to meet
changing levels of demand. For
example, retail businesses tend to
hire more temporary workers
during peak trading seasons.
The cost of labour is proportionately
higher than the cost of other factors
of production. Examples are
traditional forms of agricultural
farming, teaching, psychiatry.
Labour-intensive production can be
very expensive. For example, in private
fee-paying schools and health clinics,
labour costs account for the largest
proportion of production costs, so the
price charged to customers is
relatively high.
Labour-intensive production processes
tend to be used to produce individual
or personalised products (such as a
Hollywood movie or a custom-made
wedding dress).
 Capital Intensive Pros & Cons
Capital-intensive production
enables firms to use mass
production techniques, such as
automation in car manufacturing.
Unit costs of production are
therefore relatively low.
Technologies reduces human error
in the production process. More
efficient production.
Capital-intensive methods of
production can involve huge
set-up costs (such as purchase
and installation), running costs
(such as servicing and
maintenance) and replacement
costs (when equipment becomes
outdated and in need of
upgrading).
The reliance on assembly lines
means any breakdowns will cause
major problems for the business.
 What determine the demand for
factors of production?

➢ Consumers demand for their

products
➢ Factor prices
➢ Factor availability
➢ Factor productivity
 Factor Substitution
Replacing labour in the production process with capital as
the wages rises or productivity of capital increases.
However, labour and capital are not perfect substitutes-
depend on the type of product and production process
used. E.g: automated mass production used to produce
cars/newspapers/paints. BUT, machine can’t replicate
doctors, hairdresser, hand made jewelleries
◦ Costs of installing /repairing machines are more
expensive-
◦ Short-term costs may arise- need to train workers to
handle all machines
 Factor Substitution
◦ Replacing labour with capital may caused
disputes between trade unions and employers
over possible job losses.
◦ Strikes and redundancy payments for those
forced to leave can be very expensive for a
firm.