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Unlock This CourseFirms do not hire workers or buy machines for fun. They need them to make goods and services that people will buy. Remember, the factors of production are land, labour, capital and enterprise. A firm decides how much of each to use. This lesson looks at what changes that decision, and then at how firms choose between using lots of workers or lots of machines.
Key terms:
There are four main influences. Each one changes how many workers, machines or other factors a firm wants.
Nobody wants a factor for its own sake. A firm wants it because customers want the product. So demand for a factor is a derived demand. If demand for ice cream rises, ice cream firms want more workers, freezers and delivery vans. If demand for the product falls, demand for these factors falls too.
If one factor becomes dearer, a firm may use less of it. If wages rise a lot, a firm may use fewer workers. If machines become cheaper, it may buy more of them. Firms compare the prices of different factors and use more of the cheaper one when they can.
A firm cannot use a factor that it cannot find. If there are few skilled welders in a country, firms cannot hire many. If a rare metal is hard to get, demand for it is limited by what can be bought. Factors that are easy to get are used more.
A factor that produces more is worth more to a firm. If workers or machines become more productive, the firm will want more of them, and may be willing to pay more for them.
Dalmora Pottery makes mugs. A famous chef starts using its mugs in her restaurants, so demand for the mugs rises. The firm hires 10 more potters and buys a second kiln. The extra demand for potters and kilns is a derived demand. Later, wages for potters rise, so the firm buys a faster machine for shaping mugs. The price of one factor has changed, so the firm uses a different mix.
Firms can often make the same product in different ways. Labour-intensive production uses a lot of workers and not much capital. Capital-intensive production uses a lot of machines and equipment and relatively few workers.
| Method | Example |
|---|---|
| Labour-intensive | A small hotel where staff clean rooms, cook and serve guests by hand; a hairdressing salon |
| Capital-intensive | A car factory where robots weld and paint; a large automated bottling plant |
The same product can be made in different ways in different countries. A rice farm in a country with many workers and few machines may use lots of people to plant and harvest by hand. A rice farm in a country with high wages may use a few people with large machines.
A firm picks the method that suits its situation. These are the main reasons.
Advantages: low start-up cost, since machines are not needed; easier to make products to a customer's own wishes; creates jobs; workers can adapt quickly when customers want something different.
Disadvantages: wages are a large cost; output is lower and slower; quality can vary from worker to worker; labour problems such as strikes or sickness can stop work.
Advantages: large output at a low cost per item; consistent quality; machines can work for long hours without getting tired; fewer wages to pay.
Disadvantages: very high cost to buy and set up machines; machines break down and need repair; fewer jobs, so workers may lose work; hard to change the product quickly.
Karvela Garments, in a made-up country, has two choices for making 1,000 shirts a week. Method A uses 50 workers and 5 sewing machines. Method B uses 5 workers and 20 automatic machines. Wages in Karvela are low and the market is small. Method A is likely to be the better choice because workers are cheap and the firm does not sell enough shirts to pay for 20 costly machines.
Saying labour-intensive just means "more workers in total". It means a lot of labour compared with capital, so a large firm with many machines and many workers can still be capital-intensive. Another mistake is saying one method is always better. It depends on costs, the size of the market and the product, so use these in your answer.
Nolvar is a country with low wages. Tamsin Foods makes jam in a small factory with 60 workers. Demand for its jam has risen sharply, and the owner is thinking about buying a large automatic machine to fill jars.
(a) Explain what is meant by derived demand. [2 marks]
(b) Analyse two reasons why Tamsin Foods may choose to stay labour-intensive. [4 marks]
(c) Discuss whether the owner should buy the machine. [6 marks]
(a) Derived demand is demand for a factor of production that comes from the demand for the product it makes (1). For example, demand for workers rises because demand for jam rises (1).
(b) Wages are low in Nolvar, so labour is cheap compared with a machine (1), which keeps the cost per jar low (1). A large machine is expensive to buy (1), and the owner cannot be sure that the high demand will last long enough to pay for it (1).
(c) For buying: the machine would make more jars at a lower cost per jar (1) and demand has risen, so a large output could be sold (1). Against: it costs a lot to buy and repair (1), and some of the 60 workers may lose their jobs (1). Wages are low, so the saving on labour may be small (1). Judgement: the owner should only buy it if demand will stay high enough to use the machine fully for years (1).
In part (c), give points for and against, then end with a short judgement that uses the facts in the context, such as low wages and rising demand.