Changes to the Factors of Production (Cambridge International IGCSE Economics)
The Mobility of the Factors of Production
Spec point — The influences on the mobility of the various factors.
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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
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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
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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
Spec point — The causes of changes in the quantity and quality of the various factors
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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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