firms

• Factors of production employed are influenced by the type of product produced, the productivity of the factors, and their cost
• When factors of production are substitutes, a rise in productivity or fall in cost of one factor may result in a change in the combination of resources being employed
• For example, a fall in the price of aircraft may lead to airlines flying to more destinations, employing more pilots, cabin crew, and obtaining more take-off and landing slots at airports
• In altering factors of production, a firm may find it easier to change the quality of resources with some factors than others
• In the short run, there is likely to be at least one fixed factor of production
• It is important to achieve the right combination of factors of production to achieve the highest possible productivity
• Key factors influencing demand for capital goods include:

  • Price of capital goods
  • Price of other factors of production
  • Profit levels
  • Corporation tax
  • Income interest rates
  • Confidence levels
  • Advances in technology
• A rise in the price of capital goods leads to a contraction in demand, while an increase in the price of another factor, especially labor, may increase the demand for capital goods
• High profit levels give firms the ability and incentive to buy capital goods
• A cut in corporation tax means firms have more profit to reinvest in business, increasing the incentive to do so
• Rising real disposable income leads to increased consumption
• A cut in interest rates raises consumption, encouraging firms to expand their capacity
• Firm's expectations about the future influence investment; confidence in rising sales leads to investment, while pessimism results in a decline
• Advances in technology increase the production of capital goods
• Economies of scale refer to the advantages gained by an individual firm by increasing its size, resulting in internal and external economies of scale
• Internal economies of scale include:

  • Buying economies
  • Selling economies
  • Managerial economies
  • Labour economies
  • Financial economies
  • Technical economies
  • Research and development economies
  • Risk-bearing economies
• Internal diseconomies of scale include difficulties in controlling the firm, communication problems, and poor industrial relations
• External economies of scale include a skilled labor force, a good reputation, specialist suppliers, specialist services, specialist markets, and improved infrastructure
• External diseconomies of scale arise when an industry becomes too large, leading to increased transport, congestion, higher costs, and competition for resources