Capital and Labour Intensive Productions Comparison
Written by Amina Meirkhan | Proofread by Yasmin Uzykanova
Definitions:
Capital intensive - production that relies more heavily on machinery relative to labour.
Labour intensive - production that relies more heavily on labour relative to machinery.
Technical economies of scale - when the firm is able to reduce average costs because large factories are more efficient than small ones as there can be more specialisation and investment in machinery. For example, a small firm might use a machine once a week, whereas a large firm uses it every day of the week and therefore gains more benefit for the same cost.
Laying off - to stop employing someone because there is no work for them to do.
Some firms use relatively more labour than capital when producing goods and services. Therefore, their production is said to be labour intensive. If a firm uses more capital than labour, it is said to have capital intensive production.
Advantages and Disadvantages of Capital intensive production:
Advantages
Production can continue without stopping, with short breaks to allow for machinery maintenance.
Human error is reduced and product quality becomes better and more consistent.
Absence or shortage of skilled workers is not a large problem, since the production does not rely on labour heavily.
The firm can reduce average costs as it benefits from technical economies of scale.
Disadvantages
The cost of purchasing and installing new machinery can be too high.
Most machinery cannot improve production processes, it just makes it more efficient.
Switching from labour intensive to capital negatively impacts workers who are laid off and lose their job.
Once the machinery is installed, it can be difficult to adjust to the changing customer tastes and fashions which require changes in product.
However, the cost of purchasing new machinery can be financed with a bank loan and paid off over a period of time. Artificial intelligence is also changing the inability of machinery to improve production processes.
Advantages and Disadvantages of Labour intensive production:
Advantages
The firm can adjust the number of workers hired as demand for its goods and services fluctuates.
Depending on the industry, workers can build meaningful connections with customers, which helps to create customer loyalty.
Workers can generate new ideas and offer improvements to production processes.
Disadvantages
Periods when worker productivity is low can occur.
The firm might find it difficult to recruit new workers when required. And laying off workers might make the firm unpopular.
The more skilled the labour required, the higher the cost of paying wages for the firm will be.
Each worker requires wage and non-wage benefits, which adds to the production costs of the firm.
Workers can get ill and unable to work for certain periods of time.
When considering how to produce goods and services most efficiently, firms will consider the nature of their goods and services & the advantages & disadvantages of capital/labour intensive production. Constant improvements to technology & process innovation mean that firms are constantly evaluating the possibilities of moving from labour to capital-intensive production
