Firms & Production
Microeconomic Decision Makers · 2 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 4% of your exam marks.
New emphasis in the 2027 syllabus; demand for factors of production, labour- vs capital-intensive production, and the effects of investment on productivity are examined directly. Guidance based on specimen materials.
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.
Explain the advantages of capital-intensive production (4 marks)
What comes up: "Explain two advantages of capital-intensive production" — a 4-mark question, two developed points.
Write (two marks each): (1) Lower costs of production (1) because the firm can produce on a large scale, which can mean lower prices or higher profits (1). (2) Higher productivity / efficiency (1) because machines can produce more, and faster, than workers (1). The mark scheme also credits more consistent quality.
Watch out: Keep the advantage on the capital-intensive side and develop it. Saying "it uses machines" is not an advantage; the advantage is the lower cost, higher output or better quality the machines deliver.