Firms and production 

Employing factors of production

Factors affecting the employment of FOP

1. Type of product produced
2. Productivity of factors
3. Costs of factors of production

• A firm changes its employment of factors of production depending on the quantity of goods it needs to produce. 
• The short-run is when at least one factor of production remains unchanged. 
• Capital is not usually changed in the short run.
• The quantity of labor may be easily changed in the short run (overtime pay and hiring new workers). 

Combining factors of production

Combining factors of production in the right combination could maximize productivity which could lead to more efficient production.

Factors affecting demand for capital goods

1. Prices of complements and substitutes: an increase in the price of FOPs that are substitutes to capital goods, such as labor could increase demand for capital goods. An increase in the price of complements to labor could lead to a decrease in demand for labor. 

2. Level of profit: If profit levels are high then firms will be more likely to demand capital goods. 

3. Rate of corporation tax: A reduction in corporation taxes would lead to higher profits and hence a higher ability to demand capital goods. 

4. Increasing real disposable income: An increase in real disposable income would lead to higher consumption leading to an increase in demand for capital goods.

Factors affecting demand for land

Productivity of agricultural land: the more productivity the agricultural land is the more its demand 

Land at city centers: the closer land is to the city centers 

When do firms prefer labor-intensive methods of production?

1. Supply of labor is abundant and hence cheap: Firms may choose to hire labor instead of capital if labor in the country is abundant, which would make it easy and cheap to acquire. 

2. Small firm size: A firm may be too small to take maximum advantage of capital. 

3. Producers may wish to make handmade goods due to higher demand: Producers may choose to produce handmade goods because they have higher demand hence more efficient use of resources. 

4. Workers are more flexible than capital: Workers can quickly make small adjustments to their tasks when asked to, this may not always be possible with labor. 

5. Labor feedback can improve production methods: Workers can provide feedback that can prove useful to the firm for more efficient production. 

When do firms prefer capital-intensive production?

1. Advances in technology: New advances in technology, make capital goods more affordable and productive.
2. Technical economics: Firms switch to capital goods to achieve lower costs of production
3. Production of standardized goods: Capital goods can help produce standardized products, without any error and hence are opted for by firms.
4. No industrial action: Capital goods cannot stop production by participating in industrial action, which can make more firms choose over labor.
5. They are not affected by illness: Because capital goods are not affected by illness, they do not need days off making them more productive.

Production and productivity

There are clear links between production and productivity, but they are not the same thing. If output per worker hour increases and the number of working hours stays the same, production will increase. It is possible, however, that productivity could rise and production could fall. This could occur if unemployment increases. Indeed, a rise in unemployment may increase productivity as it is the most skilled workers who are likely to keep their jobs.

As economies develop, both production and productivity tend to increase due to advances in technology and improvements in education. The developments can result in productivity rising so much that total output can increase while the number of working hours declines.