Microeconomic Decision Makers · 2 question types
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.
is spending by firms on capital goods, such as machinery, equipment, buildings and technology.
Investment is one of the most powerful ways to raise productivity. When a firm invests in better capital equipment, IT systems or software, its workers can produce more output per hour and to a higher quality, so productivity rises. Higher productivity lowers the average cost of each unit, which can let the firm cut prices, raise profits or do both.
The link runs the other way too. A fall in investment can leave a firm using older, less efficient equipment, which raises its average costs of production, pushes up prices and can reduce workers' productivity and skills over time. Investment in training alongside new machinery matters, because workers need the skills to use the new capital effectively.
Analyse how investment affects productivity (6 marks)
What comes up: "Analyse how an increase in investment may raise productivity" (6 marks), or a discuss question on whether investment benefits a firm or economy (8 marks).
Write: Investment in new capital equipment (1) lets workers produce more output per hour (1) and to a higher quality (1), raising productivity. Higher productivity lowers average costs (1), which can reduce prices or raise profits (1). For 8 marks, add the other side: investment is expensive and may not pay off if demand is weak, and workers may need retraining before the new capital raises output.
Watch out: Distinguish production from productivity throughout. The marks are for the chain from new capital to more output per worker and then to lower average cost, not simply "the firm produces more".