Labour & Capital-intensive Production (Cambridge International IGCSE Economics)
Exam board Cambridge International · IGCSEUpdated 2024-06-18
The Distinction Between Capital- and Labour-intensive Production
Spec point —
3.6.2· The reasons for adopting the different forms of production and their advantages and disadvantages.
- 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
Spec point —
3.6.2· The reasons for adopting the different forms of production and their advantages and disadvantages.
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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
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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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