Cambridge O Level Economics: Trade unions, factor demand, labour and capital, and market structure (2281) – Revision Notes

These notes condense sections 3.4, 3.6 and 3.8 of the Cambridge O Level Economics (2281) syllabus for examination in 2026. For full explanations and worked examples, read the study guide. Then test yourself with the practice set. Course links: the hub, the checklist and the free diagnostics. All figures below are invented and illustrative.

Key definitions

Term	Meaning
Trade union	An organisation of workers that protects and improves members’ pay, conditions and job security
Collective bargaining	Negotiation between a union and employers on behalf of all members
Derived demand	A factor is wanted because its output is wanted, so factor demand follows product demand
Labour-intensive	Production in which labour is the main input
Capital-intensive	Production in which machinery is the main input
Production	Total output
Productivity	Amount produced for each unit of input used, such as each worker
Monopoly	One firm supplying all or most of a market
Barrier to entry	Anything that stops new firms joining a market

3.4 Trade unions

Role (3.4.2)

• Collective bargaining: one negotiation for all members over pay, hours and conditions
• Protecting employment: opposing job cuts, seeking better exit terms and retraining
• Influencing government policy (minimum wage, employment law, taxes)

Three viewpoints (3.4.3)

	Advantage	Disadvantage
Workers	Higher pay, better conditions, security, a voice	Fees, lost pay in strikes, jobs may be lost if pay rises too far
Firms	One negotiating body; better communication; stable workforce	Higher costs; disruption; less flexibility
Government	Orderly bargaining; worker views in policy	Lost output and tax revenue; cost-push pressure on prices; benefit costs if jobs go

Strength rises with: high membership, low unemployment, scarce skills, a profitable firm, strong demand for the product, funds and unity, difficulty of replacing workers.

Strength falls with: high unemployment, easy substitution by machines or other workers, a struggling firm, low membership, divided members.

Method: evaluating a pay claim

1. Work out the extra wage bill: workers × wage rise.
2. Work out labour cost per unit: wage bill ÷ output.
3. State the firm’s options: raise price, accept lower profit, raise productivity, cut jobs.
4. Judge which is likely, using demand for the product, labour’s share of costs and union strength.
5. Give the other viewpoints (workers, government) and reach a reasoned conclusion.

Reminder example. 20 workers on 350 a week: bill 20 × 350 = 7,000. An 8% rise gives 7,000 × 1.08 = 7,560, so 560 more a week. If output is 1,400 units, labour cost per unit rises from 5.00 to 5.40.

3.6 Firms and production

Factor demand (3.6.1)

Influence	Effect on demand for a factor
Demand for the product	Higher demand for the product raises demand for the factors that make it
Price of different factors	If one factor gets dearer, firms use less of it and more of its substitute
Availability	Scarce factors are hard to hire, so less is used
Productivity	More output per unit makes the factor more valuable, so demand tends to rise

Chain: consumers want more product, so the firm raises output, so it hires more factors. Higher productivity can offset this by letting the firm meet extra demand with the same inputs.

Labour- or capital-intensive (3.6.2)

	Labour-intensive	Capital-intensive
Typical goods	Personal services, hand-made, custom	Standard goods in bulk
Chosen when	Wages are low; the market is small; finance is scarce; a personal touch matters	Wages are high; the market is large; finance and technology are available
Advantages	Low start-up cost; flexible; personal; many jobs	High output; low unit cost at scale; consistent quality; long hours
Disadvantages	High unit cost if wages rise; slower; errors; strikes and absence	High set-up cost; breakdowns; fewer jobs; risky if demand falls

Reminder calculation. Output 900 units a week with 6 workers gives 900 ÷ 6 = 150 units per worker. A firm can compare methods by cost per unit: total cost of all factors used ÷ output. The method with the lower figure is cheaper at those factor prices, but check how sensitive the answer is to a change in wages.

Production and productivity (3.6.3)

	Production	Productivity
Measures	Total output	Output per worker (or per hour, or per machine)
Can rise because of	More inputs, better technology, higher demand, good weather	Training, better machines per worker, motivation, management, health
Key point	Can rise while productivity falls	Rising productivity tends to lower unit cost

Reminder calculation. A team of 15 workers makes 1,800 units: 1,800 ÷ 15 = 120 per worker. After training, 12 workers make the same 1,800: 1,800 ÷ 12 = 150, an increase of 30 ÷ 120 = 25%. Same production, higher productivity, three workers freed for other tasks (or fewer needed).

3.8 Market structure

Competitive markets (3.8.1): many firms

Variable	Effect
Price	Held down by rivalry
Quality	Pushed up as firms compete for customers
Choice	Wide
Profit	Squeezed; weak firms leave

Possible drawbacks: small firms may miss economies of scale; thin profits leave less for research.

Monopoly (3.8.2)

	Points
Characteristics	One dominant seller; high barriers to entry; few or no close substitutes; price influence
Advantages	Economies of scale; high profits can fund research; patent rewards; avoids duplicated networks
Disadvantages	Higher price; lower output; less choice; less pressure on quality and cost

Market share: firm’s sales ÷ total market sales. A firm selling 45,000 of 60,000 units has 75%.

Syllabus note: no diagrams or perfect and imperfect competition theory are required.

Chains of reasoning to practise

Union wins a large pay rise. Wage bill rises, so unit labour cost rises, so the firm either raises price, accepts lower profit, invests in machines, or cuts jobs. Workers gain if jobs are kept; if the firm cuts staff, some members lose. The government may see higher spending and prices, or more consumer demand from higher incomes. The outcome depends on how much customers cut back when prices rise and on how far productivity also rises.

Wages rise relative to machine prices. Labour becomes the dearer factor, so the cheapest method shifts towards capital. The firm hires fewer workers per unit of output. The shift is slower if machines are costly to buy, if the market is small, or if the product needs a personal touch.

Productivity rises by 10%. Each worker produces 10% more. The firm can raise output with the same staff, or keep output the same with fewer staff. Unit labour cost falls unless pay rises by as much, which gives room to cut prices or pay more.

Many firms enter a market. Rivalry increases, price pressure rises, quality and choice tend to improve, and profit per firm falls. Consumers gain, but weaker firms may close and jobs may be lost.

Monopoly evaluation. State a benefit (scale savings), state a cost (higher price, less choice), then give the condition that decides it: whether savings are passed on, whether barriers are high, and whether the government regulates.

Must-know distinctions

• Production vs productivity: total output vs output per input.
• Labour-intensive vs capital-intensive: which factor makes up most of the input or cost.
• Collective bargaining vs strike: bargaining is the normal route; a strike is a withdrawal of labour when bargaining fails.
• Competitive market vs monopoly: many sellers vs one dominant seller.
• Advantage vs benefit to all: a monopoly’s lower costs only help consumers if they are passed on.

Quick self-test

1. Define a trade union.
2. Name the three parts of a union’s role in the syllabus.
3. 25 workers earn 320 a week. Find the wage bill and the bill after a 5% rise.
4. Give two factors that make a union stronger.
5. A bakery’s output rises from 2,400 loaves with 16 workers to 2,640 loaves with 16 workers. Find productivity before and after, and the percentage change.
6. Why is demand for a factor called a derived demand?
7. State two reasons a firm might choose capital-intensive production.
8. A firm sells 63,000 of 90,000 units in a market. Find its market share.
9. Give one advantage and one disadvantage of monopoly for consumers.
10. A firm’s labour cost is 5,600 for 800 units. Find labour cost per unit.

Answers

1. An organisation of workers that protects and improves members’ pay, conditions and job security.
2. Collective bargaining; protecting employment; influencing government policy.
3. 25 × 320 = 8,000; 8,000 × 1.05 = 8,400.
4. For example: high membership and low unemployment (also scarce skills, a profitable firm).
5. 2,400 ÷ 16 = 150; 2,640 ÷ 16 = 165; (15 ÷ 150) × 100 = 10% increase.
6. It arises from demand for the goods the factor helps to produce.
7. For example: high wages; a large market; lower unit cost at scale; consistent quality.
8. 63,000 ÷ 90,000 = 0.70, so 70%.
9. Advantage: lower costs through scale may allow lower prices. Disadvantage: little choice or higher prices.
10. 5,600 ÷ 800 = 7.00.

Where marks are usually lost

• Defining a trade union as only a group that goes on strike.
• Giving one viewpoint when the question names workers, firms and government.
• Listing factors that affect union strength without saying why each one matters.
• Mixing up production and productivity, or quoting total output as productivity.
• Calling a method cheaper without calculating cost per unit.
• Saying capital-intensive is always better, or that it always destroys jobs.
• Writing “many firms means low prices” without linking rivalry to price and profit.
• Calling monopoly bad without a counter-argument, or good without a condition.
• Drawing diagrams for 3.8 when words are enough.

Official syllabus

The source is the Cambridge International syllabus for O Level Economics (2281), examination year 2026, version 2. The relevant parts are 3.4, 3.6 and 3.8.