Eco all

Factors Affecting demand for factors of production

Demand for product produced

Cost of factors of production

Quantity and availability of factors of production

Quality of factors of production

Demand for product produced effect on demand of FOP

Demand of FOP is derived demand which means the demand for FOP depends on the demand for goods and services that they will produce

Cost of FOP

Higher the cost of FOP, the lower the demand tends to be as they will switch to cheaper alternatives cause the firm will make less profit

Quantity and availability of FOP

Greater availability → lower cost → higher demand

Quality of FOP

higher productivity → higher demand

Labor intensive production

High proportion of labor, more than capital

Advantages of Labor intensive

Increase the demand for labor, reducing unemployment, increasing income, improving standards of living

Reduces Unemployment , reduces government spending on unemployment benefits, government have more to spend on health care and education

Labour may be more flexible than machines and able to change skills so are more mobile and able to respond to changes in consumer demand

Disadvantages of Labour intensive

Labour may cost more so increasing total cost

Unreliable so reducing efficiency and productivity increasing average cost reducing supply increasing price and reducing quality

May be protected by trade unions more disruption, delaying production process, won’t be able to meet consumer demand on time

More breaks reducing productivity and efficiency

Less cost effective reducing international competitiveness, reducing exports

Capital Intensive production

Company employs higher proportion of capital in the production process than labour employed

Factors which influence the demand for capital goods

Price of Capital goods

Rise in price of other factors of production like labour

Cut in interest rate

Cut in corporate taxes

Rising disposable income

Advance in technology

Confidence of Firms

Price of capital goods effect on demand for capital goods

If the price of capital goods increase, average cost will increase, so demand for capital goods will decrease

Rise in price of other factors of production like labour effect on demand for capital goods

Increase the demand in capital goods as they are a substitute for capital

Cut in interest rate effect on demand for capital goods

Increase consumption which will encourage firms to expand

Lower cost of borrowing so firms have to pay less interest on the capital increasing firms which can afford capital

Cut in corporate taxes effect on demand for capital goods

More profit to reinvest into the company, increase in capital’s demand

Rising disposable income effect on demand for capital goods

Encourage firms to invest expecting to sell higher output in the future

Advances in technology effect on demand for capital goods

Increase productivity of capital goods so more likely to invest more

Firm’s confidence effect on demand for capital goods

Optimistic about future and expect sales to rise, will invest more so demand for capital will rise

Factors that effect Firm’s choice of capital or labour instensive production

Cost of labour compared to cost of Capital

Types and goods and services provided by the business

Type of organization

Availability of FOP

Size of market

Cost of labour compared to cost of capital effect on type of FOP’s used

Firms will tend to choose capital intensive methods if cost of labour are relatively high

Types of goods and services provided effect on type of FOP;s used

Derived demand, depends on type of goods and services provided

Type of organisation

Smaller organisation → less funds to invest in capital goods → have to choose labour

MNCs and bigger firms → more funds to invest in capital goods → tend to get capital goods

Availability of FOP effect on type of FOP;s used

If country has large workforce available , MNC’s choose to expand there if they are labour intensive as they will be higher skills and qualifications of labour so higher productivity and efficiency reducing average cost

If a country has lower workforce, Firms will have to rely more on capital goods if they can afford it

Size of market effect on type of FOP;s used

Capital goods are used in mass market products, labour used for personalized experiences

Production

Process where firm combines scarce resources of land, labour and capital to make goods and services to satisfy consumer demand

Productivity

Output per worker, measures efficiency in the use of factors of input in the production process,

Importance of higher productivity for an economy

Economies of scale, as higher levels of output help reduce unit costs, reducing prices

Higher profits, used to reinvest in the business and expand

Higher wages, firms can afford to pay higher wages to their workers because of cost saving and higher profits cause of higher productivity, attracting better workers with more skills and qualifications who are even more productive

Improved competitiveness, firm can compete in a global stage

Economic growth, economy moves from inside the PPC to on it, due to higher efficiency, causing economic growth, causing an outward shift of the PPC, raising employment, improving living standards. Higher wages and efficiency also means the government collects more tax revenue which they can use on education and healthcare

How to increase the productivity of labor

Increase wages, increasing motivation of workers

Improving working conditions so reducing stress

Providing training so increasing workers skill so increasing efficiency and productivity

Higher education will increase skills and qualifications of labour so increasing the quality of labour so increasing efficiency and productivity

Buying more capital goods so workers will be working with better equipment

Subsidies worker’s health care so making them fitter and healthier to work

Characteristics of perfect competition

Many buyers and sellers none of which have significant market power to influence the demand or supply of the market

Firms are price takers, firms aren’t determined by firms but by market forces of supply and demand#

No barriers to entry, freedom for new firms to enter or exit the market

Homogenous products, products sold are identical

Both buyers and sellers will have perfect knowledge about the products and prices being charged by the competitors

Each firm only produces small percentage of the overall production in the industry, each firm has a tiny share of the total market supply

Performance of competitive firms

Businesses will charge the same price and price will be the minimum they could charge without going out of the business

Price equal to lowest average cost of producing a good

No firm will risking charging more than the market price as they would make no sales as consumers would switch to cheaper alternative

Firms constantly seeking to gain competitive advantage by improving their products and lowering their price through being more productive

Firms only earn enough profit to keep producing the product

In the short term they may earn more or less than this level of profit which is referred to as normal profit

If demand rises firms will make supernormal or abnormal profit, profit which is above that needed to keep a firm in the market in the long term and attracts new firms to the industry

Their entry of new firms will increase the supply of firms so lowering the price and profits return to normal level

High competition, high efficiency and productivity, low average cost, high supply, low price, high quality, high variety of goods and services, high consumer choices, high standards of livings

High flexibility , firms respond quickly to changes in consumer demand

Monopoly Characteristics

One seller and many buyers

Single supplier of the product in a given market, because of barriers of entry which result in a lack of substitutes and firm has full market share

Price marker, monopolies have significant market power as they control the market supply, charging higher prices while producing lower output

Imperfect Knowledge, customers and rivals have imperfect knowledge cause of monopolists ability to protect its trade secrets protecting monopolies position

Higher barriers to entry,

Barriers of entry

Legal barriers government makes it illegal for other firms to enter the market or patent/ copyright

Scale of Production, economies of scale make low average cost making it hard for other firms to enter the industry as they will be unable to compete with the monopoly

Expensive to set up, large capital needed

Creation of brand loyalty, increasing quality of product and advertising it well so customers will be loyal to the brand

Disadvantages of Monopoly

Inefficient use use of resources due to lack of competition

For profit maximation monopolists restrict output of product and charge higher prices

Fail to respond to changes in consumers tastes and develop new products knowing consumers cant switch to rival firms

High barrier to prevent new firms from entering the market limiting the competition and ensures monopolies charge higher prices

Demand is price inelastic and there are no substitutes, so monopolies can charge higher prices to maximize profit from the low PED and less consumer choices

Lower product quality as there is no incentive for innovation cause no competition.

May Decrease quality to decrease production cost and increase profit margins.

Diseconomies of Scale

Advantages of monopolies

Economies of scale

Higher profit, able to spend on RnD increasing innovation increasing quality

Lower consumer choice will reduce confusion for consumer so less time is wasted looking for better alternative so more leisure time increasing standards of living

If its a natural economy, government may charge lower prices for essential goods

Factors affecting where someone works

Wage Factors

Non wage factors

Wage factors

Wages, level of salary pay or wage for each job attracts workers as the higher the wage rate on offer, the more a person would want a job

Overtime pay, paid to workers who work more than standard working week

Bonus, extra payment given during the year to workers who produce above standard amount

Commission, percentage of the value of the products or services sold

Non wage factors

Job satisfaction,

Type of work

Working condition

Working Hours

Length of holidays

Fringe benefits

Job security

Career prospects

Size of firm

Job satisfaction explained

Someone may enjoy a challenging occupation not boring and workers enjoy what they are doing

Type of work explained

Most people would rather do non manual work rather than manual work as it is less tiring and provides higher pay

Working conditions

Most people prefer to work in a pleasant and safe surrounding with less stress and pressure with friendly colleagues and enjoying regular breaks

Working hours

People tend to avoid jobs which involve very long working hours or unsociable hours

Length of holidays

People prefer regular and long holidays to take a break from their job

Fringe benefits

Extra benefits provided to workers by their employers like subsidized meals, car, laptop, pensions, pensions education for children

Job security

Reduces risk of being redundant and provides continuity and certainty for income which occurs in an occupation which has high demand for the product or long term contracts

Career prospects

Individuals accept low wages at the start of their careers thinking there is a good chance that they will gain promotion to a well paid and interested post

Size of firms

Some people would rather work in small firms to have direct contact with the employer, others would like to work at a big firm as it offers better career prospects

Any question about high pay

Higher education, which will increase the skills and qualifications of workers increasing quality of labour, which will increase worker’s productivity which will increase the demand for labour

Low supply of labour as they are taking a long time to get educated so higher pay

The workers are part of a trade union which has strong bargaining power so power to increase workers pay

Having more responsibility so workers will be compensated with high pay

Government setting minimum wage

Question about low pay

Lower education, lowering the skills and qualifications of workers, lowering quality of labour, lower productivity of labour, increasing demand for labour.

Higher supply of labour due to higher immigration so lower pay

Part of a trade union which has low bargaining power to increase worker’s pay

Demand and supply of labour diagram

Factors which influence the demand for labour

Demand for product

Price of capital

Productivity of labour

Aggregate Demand in the economy

Demand for product effect on demand for labour

Labour demand is derived demand so labour is demanded for the goods and services it produces not for labour itself so higher demand for products mean higher demand for labour

Price in capital effect on labour

Labour can substitute capital in the production process so if capital is more expensive, firms will switch to the cheaper alternative which is labour

Productivity of labour

Demand for labour increases as productivity increases

Aggregate demand in the economy

During period of economic growth, demand for goods and services increase so higher demand for labour due to labour being derived demand

Factors on supply of labour

The size of the labour force

Length of Qualifications and training required to do the job

Working hours and Risk

Wage or Non wage benefits

Size of labour force effect on demand

If there are Fewer workers firms will find it difficult to find workers

Length of Qualifications and training required to do the job

Longer time means less workers available to do the job who are actually qualified

Working hours or risk

Higher risks and working hours mean less people willing to do the job

Wages or non wage factors

Encourage people to switch from one job to another

Trade unions

Group of workers who exist to protect the rights of workers and improve their pay and working conditions, workers join by paying weekly, monthly, or yearly fees.

Role of trade unions

Strong collective bargaining power as they negotiate on behalf of the workers to increase wages and improve working conditions and reduce working hours

Protect and improve workers rights through industrial actions like strikes

Persuade the government to pass legislation in favor of workers such as fixing the national minimum wage

Providing financial and legal support to workers who may have been unfairly dismissed

Ensuring equipment is safe to use

Provide information about a range of issues to their members like pensions

Help with education and training for workers as well as increasing the demand for the products produced by labour to increase the demand for labour

Basis of wage claims

The worker is working hard and being more productive

Increased profit so they are able to afford paying higher wages as the workers are likely to have contributes

Comparability argument: worker should receive higher pay to keep their pay in line with similar workers

Increased cost of living to maintain purchasing power and real income

Factors affecting the strength of a trade union

Economic activity,

Number of members

Level of skill

Consistent Demand for product

Government legislation

Economic activity effect on trade union strength

If output and input in a country are increasing, most industries are doing well and so should be able to improve the pay and conditions of workers and keep its workers, firms more likely to agree to requests of higher pay and working conditions

Members effect on trade union strength

More funds to fund its activities

Skill effect on trade union strength

Difficult to replace skilled workers with other skilled ones, and expensive to train unskilled workers

Consistent demand for product effect on trade union strength

Goods which are essential to consumers so strong position to bargain

Favorable Government legislation

Union will be in a stronger position if laws allow trade unions to take industrial actions

Industrial action

Workers disrupt production to put pressure on employers to agree to their demand

Industrial actions include

Overtime ban: refusing to work longer than contracted hours

Strikes: refusing to work

Work to rule: only undertaking tasks required in their contract

Discrimination effect on pay

Group of workers treated unfavorably in terms of employment, wage rate, training received, promotional opportunities lowering demand for them lowering pay

National minimum wage

Lowest amount a firm can pay its workers as set by the government

Effects of national minimum wage

Can cause unemployment since the supply of workers at this rate exceeds the demand for labour

Can raise wage rate and employment as higher wage rate will increase workers motivation and productivity.

Higher demand so increased demand for labour

How can government change wage rate?

Raising national minimum wages which will increase the pay of low paid worker

Improve education which will raise the wages of skilled workers as the demand for them will increase, MNCS may also be attracted increasing job opportunities

Government could affect immigration and make it easier for foreign people to work, increasing the supply for labour, which will reduce wages

Anti discrimination laws which will increase career prospects of and wages of disadvantaged people

Changes in earning overtime in working life (7)

Level of education

Years of experience, inexperienced workers earn less

Time spent at the firm, increase as more time is spent

Some people may choose to take on more responsibility for more pay

Some people may switch employers for more pay

After workers reach the peak of their career, their salaries likely remain constant

After retirement, earnings fall and they are dependent on pensions

Why do different jobs have different pay?

Abilities and Qualifications

Risk involved

Unsociable hours

Lack of info about other jobs and wages

Labour immobility

Fringe benefits

Abilities and qualifications explained wage rate

Jobs require more skills and qualifications mean higher pay

Risk explained wage rate

Paid more for the risk they undertake

Unsociable hours explained wage rate

Paid more for night shifts and other unsociable hours

Lack of info explained wage rate

Work for less wage cause they don’t know other jobs with higher wages

Labour immobility

How easily workers can switch between jobs, high labour immobility means workers can easily switch to other high paying jobs, labour immobility means they cant easily switch cause they dont have the skills and oppurtunitites to move to high paying jobs

Fringe benefits effect on wage rate

Jobs which offer high fringe rate often have low wages

Why might skilled workers earn more than unskilled?

Shorter supply as they need training and qualifications

Inelastic supply and demand

More productive

Stronger bargaining power

Likely to work in tertiary sector

May be more mobile

Why skilled workers may earn less?

Less experience and less promoted position

Declining industries

May place more importance on non-wage factors

Skilled workers in poor countries may have less income than unskilled workers in rich countries

Difference in pay between public and private sector

Public sector usually earn more than private sector, but sometimes private sector earn more cause public sector can be compensated with job security and pension prospects

Male vs Female paygap

Males usually paid higher as women tend to go for jobs with less skill required then men jobs

Women take career breaks to raise children which cause less experience and career prospects

More women work part time than full time

Discrimination

Different sectors pay gap

Primary earn less cause they produce low value output and tend to require less skills and qualification

As the economy develops first the demand for secondary sector workers increase then tertiary sector workers

Determinants of elasticity of labour

Proportion of labour in total cost

Ease in which labour can be substituted with capital

Elasticity of demand for the product produced

Time period

Proportion of labour in total cost effect on labour elasticity

If labour contributes to a large percentage of total costs, firms would notice even a small change more as it would cost a large change costs so elastic demand

Ease of which machines can be substituted with capital effect on elasticity of labour

If it easier to replace workers with machines then demand would be elastic

Elasticity of demand for product produced effect on elasticity of labour

the more elastic the demand of the product, the more the fall in demand for it if the price of it increases due to increased cost of production so demand for labour will fall, making its demand elastic

Time period effect on elasticity of labour explained

Demand for labour is more inelastic in the short term as firms have less of a time period to alter their methods of production

Detriments of elasticity of supply of labour

Qualifications and skills required

Length of training period

Level of employment

Mobility of labour

Degree of vocation

Time period

Qualifications and skills required affect on elasticity of supply of labour

More qualifications and skills needed, the more inelastic the supply will be as it will take years to take the qualification needed

Length of training period affect on elasticity of supply of labour

Inelastic as takes longer to finish the training

Level of employment affect on elasticity of supply of labour

If most of the labour force are already employed, the supply of labour for any occupation will be inelastic and employers will have to raise price significantly to attract more workers and encourage the workers employed in other occupations to switch their jobs

The mobility of labour affect on elasticity of supply of labour

The easier it is to switch jobs, the easier it will be for the employer to recruit more workers when increasing the wage rate as the supply will be elastic

Degree of vocation affect on elasticity of supply of labour

The stronger the attachment to their jobs the more inelastic the supply of labour will be

Time period affect on elasticity of supply of labour

Supply of labour becomes more elastic over time for workers to notice changes in wages and gain any qualifications and undertake any training needed for the new job

Geographical immobility

Difficult to move from one country to another

Occupational Immobility

Difficult to switch from one job to another