What this lesson teaches
I can explain why firms choose labour-intensive or capital-intensive production and weigh each.
Syllabus K343, 3.5.2. Labour-intensive and capital-intensive production: reasons for adopting the different forms of production; advantages and disadvantages of the different forms of production
Make a guess
A carpenter makes a few custom-designed tables each month. Is labour-intensive or capital-intensive production better for him?
- Capital-intensive, because it uses less money.
- Capital-intensive, because machines are always cheaper.
- Labour-intensive, as each table is custom.
Show the answer
Labour-intensive, as each table is custom.
Small, custom batches suit skilled workers. Machines pay off when large numbers of identical items are made.
Labour-intensive production uses mostly workers; capital-intensive production uses mostly machines.
Labour-intensive production uses a lot of workers and few machines. Hair salons and craft workshops are examples. Capital-intensive production uses a lot of machines and few workers. Car plants and oil refineries are examples.
Firms use more workers when labour is cheap and easy to find. They also do so when they make only a small amount, or when buyers want something made just for them.
Firms use more machines when workers are costly or hard to find. They also do so when they make large amounts of the same thing, or when each item must be exact.
Machines can cut the cost of each unit when output is large, and they give the same quality every time. But they cost a lot to buy and can break down. Workers are easier to start with and can switch tasks. But each unit costs more as output grows.
- Labour-intensive
- High proportion of labour; e.g. hairdressing.
- Capital-intensive
- High proportion of machines; e.g. car factories.
- Choice depends on
- Relative cost of labour and capital, scale, type of product.
Worked example: Why Singapore firms automate
Singapore has high wages and a limited labour force.
- Labour is expensive and hard to find, so firms have an incentive to use machines.
- Examples: robots in factories, self-checkout counters in supermarkets, automated cranes at the port.
- Benefit: output per worker rises.
- Drawback: high upfront cost and the need for workers with technical skills to maintain the machines.
Watch out for this
Capital-intensive production uses a lot of money.
Here capital means machines and equipment, not money. Capital-intensive means using many machines relative to workers.
Check your understanding
Which situation favours labour-intensive production?
- A firm makes small numbers of custom furniture pieces.
- A firm makes millions of identical bottles on a production line.
- Wages are very high, and skilled workers are scarce and hard to find.
Show the answer
A firm makes small numbers of custom furniture pieces.
Right. Custom, small-scale work suits skilled workers rather than machines.
Check your understanding
Which kind of production is most likely to be capital-intensive?
- A workshop making hand-made furniture
- An oil refinery
- A tuition centre
- A hair salon
Show the answer
An oil refinery
Right. A refinery uses huge, costly machinery and relatively few workers.