Labour & Capital-intensive Production (Cambridge (CIE) O Level Economics)

Revision Note

Written by: Steve Vorster, Economics & Business Subject Lead

Reviewed by: Jenna Quinn, Head of New Subjects

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

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

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

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

Last updated: 18 June 2024

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