Microeconomic Decision Makers · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 10% of your exam marks.
Fixed vs variable costs, profit calculations, and average cost appear regularly across both Section A and Section B questions.
A firm chooses how to produce, not just what. The choice often comes down to the balance between machinery and people.
Labour-intensive production uses a high proportion of labour relative to capital. The firm's main cost is wages. Examples: a hand-stitched garment factory, a restaurant kitchen, a private tutoring service.
Capital-intensive production uses a high proportion of capital (machinery, technology) relative to labour. The firm's main cost is machinery and the energy to run it. Examples: a modern car-assembly plant, an oil refinery, a large-scale farm using combine harvesters.
A few quick trade-offs.
| Labour-intensive | Capital-intensive | |
|---|---|---|
| Output quality | Personal touch, customisation | Consistent, low error rate |
| Output volume | Limited by worker numbers | Very high (machines run 24/7) |
| Flexibility | Workers can adapt to new tasks | Machines need re-tooling for new products |
| Set-up cost | Low | High (large initial investment) |
| Running cost | Wages (rising over time) | Maintenance, energy |
As wages rise in an economy, firms increasingly switch from labour-intensive to capital-intensive production. Automation and AI are accelerating this shift in many industries.