Changes to the Factors of Production (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

The Mobility of the Factors of Production

  • The mobility of the factors of production refers to how easily firms can switch between different factors of production during the production process

    • The more mobile the factors, the more flexibility there will be in production

    • E.g. If a firm can produce both cars and trucks on its production line and switching from one to the other only requires a few simple changes to some robotic arm extensions, then its capital is very mobile

    • This means that the firm can be very responsive to changes in demand for cars and trucks and is likely to make more profit

  • Labour is often one of the most expensive costs of production

    • If firms can substitute capital (machinery) for labour, productivity often increases and costs decrease

  • Many firms rely heavily on labour and ensuring labour mobility helps to lower unemployment and reduce worker shortages in an economy
     

Two Factors That Cause Labour To Be Less Mobile

Geographical Immobility of Labour

Occupational Immobility of Labour

  • This occurs when workers find it difficult to move from one geographical area to another in order to secure employment

  • Barriers to mobility may include family ties, lack of information about possible jobs in different parts of the country, and the challenges in securing/affording accommodation in an unknown location

  • This refers to the ability of a worker to change occupations when they lose a job

  • If their skill base is transferable between different occupations, then their occupational mobility is high

  • In reality, many workers are not able to easily transfer between occupations, and this is a particular issue when an economy is faced with structural unemployment

Changes in the Quantity and Quality of the Various Factors

  • If the quantity or quality of a country's factors of production change, then the productive potential of the country also changes 

    • If the quantity or quality increases, this corresponds to an outward shift of the potential output of an economy, as shown on a production possibilities curve model (see Subtopic 1.4.1). The country is able to produce more

    • If the quantity or quality decreases, this corresponds to an inward shift of the potential output of an economy, as shown on a production possibilities curve model. The country now cannot produce as much as it used to

Influences on the Quality or Quantity of Factors of Production Available to an Economy

Influence

Explanation

Technological advances

  • These can often improve the quality of the factors of production,
    e.g. development of metal alloys

Changes in the costs of production

  • Changes in the costs of factors of production (for example, higher energy costs caused by the war in Ukraine) reduce the output of a nation as the input prices are now more expensive

Changes in relative productivity

  • Process innovation often results in productivity improvement, e.g. moving from labour intensive car production to automated car production

Changes in education and skills

  • Over time, this increases the quality of labour in an economy

Changes in government regulations

  • These can improve the quantity of the factors of production, e.g. deregulation of fracking (extracting oil from shale deposits) in the USA increased useable oil reserves

Demographic changes and migration

  • A positive net birth rate or positive net migration rate will increase the quantity of labour available

Competition policy

  • Preventing monopoly power results in more firms supplying goods and services in an economy and this increases the potential output of the economy

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.