Firms & Production
Microeconomic Decision Makers
A firm chooses how to produce, not just what. The choice turns on the balance between people and machines.
uses a high proportion of labour relative to capital. The firm's main cost is wages. Examples: hand-stitched clothing, a restaurant kitchen, private tutoring.
uses a high proportion of capital (machinery and technology) relative to labour. The firm's main cost is machinery and the energy to run it. Examples: a car-assembly plant, an oil refinery, a large mechanised farm.
The choice depends on the relative price of labour and capital, the scale of output (large-scale standard goods suit capital-intensive methods) and the type of product (bespoke or personal services suit labour-intensive methods).
| Labour-intensive | Capital-intensive | |
|---|---|---|
| Best suited to | Bespoke, varied or personal output | Large-scale, standardised output |
| Output volume | Limited by worker numbers | Very high (machines can run continuously) |
| Flexibility | Workers adapt easily to new tasks | Machines need re-tooling for new products |
| Set-up cost | Low | High (large initial investment) |
| Main running cost | Wages | Maintenance and energy |
The advantages of capital-intensive production include lower costs of production when output is large, higher productivity and faster output, and more consistent quality. Its disadvantages include the high initial cost of the machinery and the risk of structural unemployment when machines replace workers. Labour-intensive production can be cheaper where labour is plentiful and low-paid and where output must be customised, but it can mean lower productivity and less consistent quality.
Common exam question
Advantages of labour- and capital-intensive production
Question: Explain two advantages of capital-intensive production, or two reasons a firm may adopt labour-intensive production (4 marks); or discuss whether labour-intensive production harms an economy (8 marks).
Asked in 3 of the 11 structured papers. In the 4-mark versions each point earns one mark for the advantage or reason and one for developing it. Capital-intensive production can bring lower costs of production on a large scale (lower prices or higher profits), higher productivity, more consistent quality, and machines that work long hours without strikes. Say lower costs overall: one scheme gives nothing for "lower labour costs". A firm may choose labour-intensive production because labour is cheap or plentiful, it sells a personal service, or its workers lack the skills for advanced machinery.
The Discuss reaches the top level only with both sides developed: labour may cost more, be less productive and less reliable, yet it keeps employment high, saves on unemployment benefits and adapts to customers better than machines.
Common exam question
Machines versus workers in multiple choice
Question: Pick the likely result of a firm replacing workers with machinery, or the situation that favours one method of production (1 mark, multiple choice).
Set in 6 of the 13 multiple-choice papers. Reason from what machinery changes. Equipment is a fixed cost, so after a switch variable costs fall as a share of total cost; wrong options beside it include a falling share of fixed costs and falling output per worker. Output per worker rises, so farms can be highly productive with few workers, and a firm adding machines while cutting staff can raise productivity and total production. A mechanised line using division of labour can raise total costs yet cut average total cost, while worker motivation falls.
For which method fits: cheap labour, or a population of mostly subsistence farmers, makes capital-intensive production unlikely, while outside money for equipment, such as aid grants, encourages it. Skilled staff preparing each item individually let a firm offer variety.