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

Revision Note

Written by: Steve Vorster, Economics & Business Subject Lead

Reviewed by: Jenna Quinn, Head of New Subjects

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

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

Last updated: 17 June 2024

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