What this lesson teaches
I can explain what affects a firm's demand for factors of production.
Syllabus K343, 3.5.1. Demand for factors of production: influences to include demand for the product, the price of different factors of production, their availability and their productivity
Make a guess
Orders for a bakery's cakes double before a festival. What happens to its demand for bakers?
- It stays the same, because bakers' wages did not change.
- It falls, because the bakery buys more machines.
- It rises, because bakers are needed to make the cakes.
Show the answer
It rises, because bakers are needed to make the cakes.
Firms demand workers to produce what customers want. When demand for cakes rises, demand for bakers rises too.
Firms demand more of a factor when demand for their product rises, when the factor is cheaper, available and more productive.
Firms do not want factors of production for their own sake. They want them to produce goods that customers buy. So when demand for the product rises, firms demand more workers, machines and space.
Price of the factor: if a factor becomes more expensive, firms use less of it and switch to others. If wages rise, a firm may buy more machines instead of hiring.
Availability: firms can only use factors they can get. A shortage of skilled workers may push firms to use more machines.
Productivity: the more output a factor produces, the more firms want it. Well-trained workers and efficient machines are in higher demand.
- Derived demand
- Factors are wanted because the product is wanted.
- Influences
- Product demand, factor prices, availability, productivity.
Worked example: A restaurant expanding
A busy restaurant decides how to serve more customers.
- Demand for the product: more diners means it needs more cooks and tables.
- Price of factors: cooks' wages have risen, so it buys a high-speed oven too.
- Availability: it cannot find experienced chefs, so it trains junior staff.
- Productivity: the new oven lets each cook prepare more meals per hour.
Watch out for this
Firms hire more workers when wages rise.
Higher wages make labour more expensive, so firms usually want fewer workers and may use more machines instead.
Check your understanding
Wages rise sharply while the price of robots falls. What are firms likely to do?
- Use more machines and fewer workers
- Hire more workers, because demand for their goods is rising
- Stop producing, because their costs are now too high
Show the answer
Use more machines and fewer workers
Right. Firms switch towards the relatively cheaper factor.
Check your understanding
Which change would reduce a firm's demand for workers?
- Demand for the firm's product rises
- Its workers become more productive after training
- Machines that do the same work become cheaper
- The wage the firm must pay falls
Show the answer
Machines that do the same work become cheaper
Right. The firm can now replace some workers with cheaper machines.