Labour & Capital-intensive Production (Cambridge (CIE) IGCSE Economics)

Revision Note

The Distinction Between Capital- and Labour-intensive Production

  • A firm’s production can be either labour-intensive or capital-intensive 

  • Labour-intensive means that the proportion of labour costs are higher than the other factors of production, including machinery  

  • Capital-intensive means that the proportion of machinery costs are higher than any of the other factors of production, including labour

Choosing Between Capital- and Labour-intensive

  • When considering how to produce goods/services most efficiently, firms will consider the nature of their good/service and the advantages and disadvantages of capital/labour intensive production 

  • Some industries require labour-intensive production and hire many workers

    • This often occurs when jobs require technical skills which are difficult/expensive to automate e.g. teachers in a school or garment workers in a clothing factory

The Advantages and Disadvantages of Labour-Intensive Production

Advantages

Disadvantages

  • The firm can adjust the number of workers hired as demand for its goods/services fluctuate

  • Depending on the industry, workers can build meaningful connections with customers which helps to create customer loyalty e.g. restaurant waiters versus iPad ordering

  • Workers can generate new ideas and offer suggestions on how processes can be improved

  • There may be periods where worker productivity is low

  • The firm may find it difficult to recruit workers when needed and letting go of staff when they are not required is unpopular

  • The more skilled the labour required, the higher the wage bill for the firm will be

  • Each worker requires both wage and non-wage benefits, which can prove expensive for the firm

  • Workers can get ill and then are unavailable for work

  • Other industries are more capital-intensive or are gradually replacing labour with capital when it makes financial sense to do so - as wages rise in a country more labour will be replaced by capital (machinery)

  • Constant improvements to technology and process innovation mean that firms are constantly evaluating the possibilities of moving from labour to capital-intensive production


The Advantages and Disadvantages of Capital-Intensive Production

Advantage

Disadvantages

  • Production can continue 24/7 with only short breaks so as to allow for machinery maintenance

  • Machinery cuts down on human error and product quality remains consistent

  • Absenteeism or a shortage of skilled workers are non issues with capital-intensive production

  • The firm can reduce average costs as it benefits from technical economies of scale 

  • The cost of purchasing and installing new machinery can be very high (but is often financed with a bank loan and paid off over a period of years)

  • Most machinery cannot improve processes, although artificial intelligence innovation is changing this

  • Switching capital for labour negatively impacts both the workers who lose their job and also the morale of the workers left behind

  • Once the machinery is installed, it can be difficult for the firm to respond to changing customer tastes/fashions which require product changes

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