Firms demand for factors as they use them in the process of production. The demand for factors is influenced by the following forces.
1. Demand for the final product:
It has been started earlier that demand for factors of production is a derived demand or indirect demand. It is derived from the demand for the product that the factor produces. For example, labor does not satisfy our wants directly. We want labor for the sake of goods it produces. If the demand for goods increases, the demand for the factors which help to produce these goods will also increase. Moreover, if the demand for goods is elastic or inelastic.
2. Quantity of other factors:
The demand for a factor of production will also depend on the quantity of the others factors required in the process of production. Generally, if the demand price for given quantity of a factor of production will be higher, greater will be the quantities of the cooperating productive services.
3. Pricing of other factors of production:
A change in the price of another factor of production that is used in combination with the given factor may cause the demand for the factor to shift. If the related factor is a substitute, an increase in its price will cause the demand curve for the given factor to shift to the right. On the other hand, if the related factor is a complement, an increase in its price will lead to the leftward shift in the demand curve for the given factor.
4. Value of the finished product:
The demand price of a factor of production depends on the value of the finished product in the production of which the factor is used. The demand price will generally be greater, the more valuable is the finished product in which the factor is used. Besides, the more productive the factor, the higher will be demand price of a given quantity of a factor.