Cambridge IGCSE Economics: Demand for factors, production and productivity, and market structure (0455)

This guide follows the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 (version 2). It covers section 3.6 Firms and production (3.6.1 to 3.6.3) and section 3.8 Market structure (3.8.1 and 3.8.2). The subject is not tiered. The syllabus says that the theory of perfect and imperfect competition is not required, and that diagrams are not required for 3.8.1 or 3.8.2, so this guide uses words and small tables instead. Every firm, country and number below is invented and used only to show a method.

Related pages: the revision notes, the practice questions, the microeconomic decision makers overview, the factors of production guide, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

What you must be able to do

Syllabus	What the syllabus asks for
3.6.1	Explain the demand for factors of production: demand for the product, the price of different factors, their availability and their productivity
3.6.2	Give reasons for labour-intensive and capital-intensive production, with advantages and disadvantages of each
3.6.3	Explain the difference between production and productivity, and the influences on each
3.8.1	Explain the effect of a high number of firms on price, quality, choice and profit
3.8.2	Describe the characteristics, advantages and disadvantages of monopoly

3.6.1 Demand for factors of production

To produce, firms use land, labour, capital and enterprise. A bakery wants bakers because customers want bread. So the demand for a factor is a derived demand: it comes from the demand for what the factor makes.

Four influences are named in the syllabus.

1. Demand for the product. If sales of the product rise, firms need more output, so they demand more labour, machines and materials. If sales fall, the demand for those factors falls.
2. The price of different factors. A firm can often make the same output with different mixes of factors. If one factor becomes dearer and another cheaper, the firm may switch towards the cheaper one.
3. Availability. If a factor is scarce, such as skilled welders in a small town, firms find it hard to hire as many as they want. They may pay more, hire fewer or use a substitute.
4. Productivity. A more productive factor gives more output for its cost, so firms are keener to use it.

Worked example 1: demand for the product

A small bakery in an invented town sells 600 loaves a day. Each baker produces 50 loaves a day.

• Bakers needed now: 600 ÷ 50 = 12.
• Demand rises to 750 loaves. Bakers needed: 750 ÷ 50 = 15.
• Demand rose by (750 − 600) ÷ 600 × 100 = 25%. Bakers needed also rose by 25% because productivity stayed the same.

If each baker made more than 50 loaves, fewer than 15 would be needed.

Worked example 2: factor prices

Firm Q (invented) can make 1,000 units a day by either method. A worker costs 60 a day and a machine costs 90 a day.

Method	Workers	Machines	Daily cost
X	10	2	10 × 60 + 2 × 90 = 780
Y	4	5	4 × 60 + 5 × 90 = 690

Method Y is cheaper, so a cost-minimising firm picks Y.

Now change one price at a time.

• Wage rises to 100: X costs 1,000 + 180 = 1,180 and Y costs 400 + 450 = 850. Y is cheaper by even more. The firm has a stronger reason to use machines.
• Machine cost rises to 200 with the wage back at 60: X costs 600 + 400 = 1,000 and Y costs 240 + 1,000 = 1,240. Now X is cheaper, so the firm switches back to workers.

A rise in the price of one factor tends to reduce the demand for it and raise the demand for its substitute. Real firms face limits: some tasks cannot be mechanised.

Availability also changes the factor price. If few skilled workers are available, wages rise and the firm may turn to machines. In an answer, say what is scarce, what happens to its price, and what the firm does next.

3.6.2 Labour-intensive and capital-intensive production

Labour-intensive production uses a large amount of labour compared with capital. Capital-intensive production uses a large amount of capital (machinery and equipment) compared with labour. Labour cost is a large share of total cost in the first case and a small share in the second.

Worked example 3: cost shares

• Firm S (a hand-finishing workshop) has total costs of 80,000 a month, of which wages are 56,000. Wages share = 56,000 ÷ 80,000 × 100 = 70%. It is labour-intensive.
• Firm T (an automated plant) has total costs of 90,000 a month, of which wages are 18,000. Wages share = 18,000 ÷ 90,000 × 100 = 20%. It is capital-intensive.

Reasons for choosing a method

Reason	Points towards
Relative factor prices	Cheap labour: labour-intensive. Cheap capital or dear labour: capital-intensive
Size of output	Small or varied output: labour-intensive. Large, steady output: capital-intensive
Type of product	Personal services, craft goods and one-off orders: labour-intensive. Identical goods in bulk: capital-intensive
Availability	Few skilled workers: capital-intensive. Little finance or technology: labour-intensive

Worked example 4: the effect of output

Method L (labour-intensive) has a fixed cost of 1,000 and a cost of 5 per unit. Method C (capital-intensive) has a fixed cost of 10,000 and a cost of 2 per unit.

Output	Cost with L	Cost with C	Cost per unit L	Cost per unit C
1,000	6,000	12,000	6.00	12.00
2,000	11,000	14,000	5.50	7.00
3,000	16,000	16,000	5.33	5.33
4,000	21,000	18,000	5.25	4.50

Both methods cost the same at 3,000 units: 1,000 + 5 × 3,000 = 10,000 + 2 × 3,000 = 16,000. Below that output, L is cheaper. Above it, C is cheaper. So a firm expecting large, steady sales gains from capital, while one with small or uncertain sales may do better with labour.

Advantages and disadvantages

	Advantages	Disadvantages
Labour-intensive	Flexible; can adapt to individual orders; low set-up cost; good where a personal touch matters; creates jobs	Wage bills rise as output rises; slower; more variation in quality; output depends on staff attendance and skill
Capital-intensive	Fast and consistent; lower cost per unit at high output; less exposed to wage rises	High purchase and maintenance cost; large fixed costs if sales fall; skilled operators needed; may cause job losses and retraining costs

3.6.3 Production and productivity

Production is the total quantity of goods and services a firm or economy makes. Productivity is output per unit of input, for example output per worker or output per machine. Production is a total; productivity is a ratio.

Labour productivity = total output ÷ number of workers.

Worked example 5: output up, productivity down

A farm in Country A (invented) produced 4,800 tonnes with 40 workers in one year. A year later it produced 5,400 tonnes with 50 workers.

• Productivity year 1: 4,800 ÷ 40 = 120 tonnes per worker.
• Productivity year 2: 5,400 ÷ 50 = 108 tonnes per worker.
• Output rose by (5,400 − 4,800) ÷ 4,800 × 100 = 12.5%.
• Workers rose by (50 − 40) ÷ 40 × 100 = 25%.
• Productivity changed by (108 − 120) ÷ 120 × 100 = −10%.

Production rose but productivity fell. The farm made more only by adding workers, and each made less.

Influences

• On production: the quantity of factors used, their quality and the productivity of those factors, and demand for the product.
• On productivity: education, training and skills; better or more machinery and technology; better organisation, such as dividing tasks; motivation and working conditions; and the quality of raw materials. Poor health or low morale lowers it.

Worked example 6: why productivity matters to cost

A worker is paid 40 an hour. If she makes 8 units an hour, labour cost per unit is 40 ÷ 8 = 5.00. After training she makes 10 units an hour. Labour cost per unit is 40 ÷ 10 = 4.00, a fall of (5 − 4) ÷ 5 × 100 = 20%. Higher productivity lets a firm cut prices, raise profit or pay more.

3.8.1 Competitive markets

The syllabus asks about the effect of having a high number of firms. You do not need the theory of perfect or imperfect competition. When many firms sell similar products, buyers can easily switch.

Feature	Effect of many firms
Price	Firms compete, so prices tend to be lower. A firm that charges much more than rivals loses customers
Quality	Firms try to stand out, so quality tends to be higher or at least kept up
Choice	Many varieties and suppliers, so consumers have wide choice
Profit	Competition and low prices hold profit down. Large profits attract new firms, which pushes profit back down

In a town with forty similar street-food stalls, a stall that raises its price loses customers to the next stall. Evaluation points: competition can lead to cost-cutting that harms quality or workers, and many small firms may miss economies of scale.

3.8.2 Monopoly

Characteristics. A monopoly is a market where one firm is the only seller or has a very large share. Typical features are:

• no close substitutes, or only poor ones;
• barriers to entry, such as high start-up costs, patents, legal protection or control of key resources;
• the firm has power to set its own price, because customers have few alternatives;
• high profit that new entrants find hard to compete away.

Firm Z sells 780 units in a market of 1,000 units. Its market share is 780 ÷ 1,000 × 100 = 78%. It dominates the market even though it is not the only seller. Legal tests of monopoly vary between countries, so say the firm has a large share and analyse from there.

Worked example 7: a monopolist’s cost and price

Suppose an industry has five small firms. Each makes 20,000 units at a cost of 4.00 per unit and sells at 4.10, so profit per firm is 0.10 × 20,000 = 2,000. One firm then takes over the rest. At the larger scale its cost is 3.30 per unit. It makes 90,000 units and charges 5.20.

• Revenue: 5.20 × 90,000 = 468,000.
• Total cost: 3.30 × 90,000 = 297,000.
• Profit: 468,000 − 297,000 = 171,000.
• Price rise for consumers: (5.20 − 4.10) ÷ 4.10 × 100 = 26.8%.

Cost per unit fell with scale, but the price did not, so the gain went to the firm. Consumers benefit only if lower costs are passed on.

Advantages and disadvantages

Advantages	Disadvantages
Economies of scale can lower costs per unit	Higher price and less output than in a competitive market
High profit can fund research and development	Less choice and little pressure to improve quality
A large firm may compete abroad and earn export income	Less incentive to cut costs, so inefficiency can continue
Natural monopoly: one firm may serve a market more cheaply than several, for example a single water network	May use its power over suppliers and workers
Stable supply in some industries	Barriers keep out new firms, so high profit can last

For evaluation, ask whether the monopoly passes on its savings, whether its position is protected, whether the government regulates it, and whether the product has substitutes.

Common errors

• Writing that productivity rose because output rose. Check output per worker.
• Saying a firm hires labour “because it wants workers”. Link it to demand for the product.
• Treating labour-intensive as “bad”. It suits some products and output levels.
• Describing monopoly only as high prices. Give an advantage and evaluate.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 3.6 Firms and production and 3.8 Market structure.