Labour-intensive and capital-intensive production
May 23rd, 2013 Posted by: Mohamed Amir
The purpose of factors of production is to convert raw materials into finished goods, that means to do production. Therefore both labour and capital are inputs that a firm can use to do the production.
In Economics, labour is the all human efforts in the production. Labour does not only mean the labourers in an industrial site. If we take an example of a tourist resort, labour includes the receptionists, bell boys, bartenders, waiters, admin assistants, telephone operators etc.
Labour-intensive production 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.
Labour intensive method of production is usually used for individual or personalised products, or to produce on a small scale.
Examples of labour-intensive production are hotels, restaurants, small scale farming, pole-and-line fishing, mining etc.
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. 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.
‘Capital’ refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service. Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.
These processes are more likely to be highly automated and to be used to produce on a large scale.
An industry that is capital intensive is – oil refining, manufacturing.
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 which could reduce average cost.
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 change 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.
Next topic: Production and productivity