Labour and capital intensive production

Factors of production

The resource inputs that go into the production of a good or service – they include:

  1. Land – factory space, land
  2. Labour
  3. Capital – machinery, tools, technology
  4. Natural resources – raw materials extracted from the earth or sea
  5. Enterprise – the risk-taker who brings the other factors of production together to produce a good or service.

Labour intensive production

Definition:

This means that the way that a good or service is produced depends more heavily on labour than the other factors of production, such as capital.

The costs of labour  make up a high % of total costs.

Question

Can you list examples of industries that are labour intensive?

Answer

E.g: an industry that is labour intensive is the restaurant and hotel industry / services.

Capital intensive production

Definition:

This means that the way that a good or service is produced depends more heavily on capital (machinery) than the other factors of production, such as labour.

The costs of capital (machinery) make up a high % of total costs.

Question

Can you list an industry that is capital intensive?

Answer

E.g: an industry that is capital intensive is – oil refining, manufacturing.

Advantages and disadvantages of capital intensive production

Compare handmade and machine made chocolate production.

 Advantages of capital intensive production

  1. Reduces human error – more accurate production.
  2. Greater speed (efficiency) and uniform effort / output.
  3. Technical economies of scale – increased efficiency => lower AC.
  4. No problems with labour shortages / planning labour.

Disadvantages of capital intensive production

  1. Initial high costs of investment and possible training costs.
  2. Lack of flexibility in responding to a fall in demand.  In contrast, labour can be used flexibly, e.g. using temporary workers.
  3. Machinery lacks initiative, e.g: it is unlikely to be innovative, provide ideas on how to improve production or take on extra responsibilities.

Advantages and disadvantages of labour intensive production

 Advantages of labour intensive production

  1. Staff, unlike machinery can be used flexibly to meet changing levels of consumer demand, e.g. temporary workers.
  2. Can provide a ‘personal touch’ and be more in-tune with customer needs and wants.
  3. Can provide tailor made products / services for different customer needs and wants.  Machinery is not flexible enough to provide custom made products / services for individual customers.
  4. Labour can provide feedback, that provides ideas for continuous improvement.  Workers can adapt to introduce new ideas.

Disadvantages of labour intensive production

  1. Relatively expensive in the long-term when compared to machinery – higher per unit costs due to lower levels of productivity.
  2. 2. Relatively inefficient and inconsistent levels of effort.
  3. Labour relation problems, e.g. may go on strike.
  4. There could be a shortage of skilled labour, unlike machinery.

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