3.6 Firms and Production

2026 Syllabus Objectives

By the end of this topic, you should be able to:

  • 3.6.1 Explain the influences on the demand for factors of production — including the demand for the product, the price of different factors, their availability, and their productivity.
  • 3.6.2 Describe the reasons for adopting labour-intensive or capital-intensive production, and evaluate the advantages and disadvantages of each.
  • 3.6.3 Explain the difference between production and productivity, and identify the influences on each.

3.6.1 Demand for Factors of Production

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What Are Factors of Production?

Before firms can make anything, they need inputs — the raw materials and resources used to create goods and services. These inputs are called factors of production, and there are four of them:

  • Land — All natural resources used in production. This includes soil, water, forests, minerals, and oil. Basically, anything provided by nature.
  • Labour — The human effort — both physical and mental — that goes into making goods and services. Workers, teachers, engineers, and doctors all count as labour.
  • Capital — Man-made tools and equipment used to help produce goods. Examples include machinery, factory buildings, computers, and vehicles. Note: capital does not mean money here — it means physical tools and equipment.
  • Enterprise — The skill and willingness to take risks by combining the other three factors to create a business. Entrepreneurs (business owners who take risks) provide enterprise.

What Influences the Demand for These Factors?

Firms do not demand factors of production for the sake of it — they need them to produce goods and services. There are four main influences on how much of each factor a firm will demand:

1. Demand for the Final Product (Derived Demand)

The demand for factors of production is called derived demand — meaning it is derived from (comes from) the demand for the final good or service being produced.

  • If more people want to buy furniture, furniture makers will need more wood (land), more carpenters (labour), and possibly more saws and machines (capital). Their demand for these factors increases because the demand for furniture increased.
  • If fewer people want to buy furniture, demand for all those inputs falls too.

Simple rule: Higher demand for a product → Higher demand for the factors used to make it. Lower demand for a product → Lower demand for the factors used to make it.

Example: A tyre manufacturer sees rising demand for tyres. As a result, they need more rubber (a natural resource), more factory workers, and possibly more machines. The demand for rubber and labour has been derived from the demand for tyres.

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