Firms and production
Labour- vs capital-intensive
- labour-intensive — lots of labour, little machinery (hand-made crafts).
- capital-intensive — lots of capital (machines), few workers (a modern car factory).
- Productivity = output per worker; raise it with training, better machines and good management.
Practice
A modern car factory with many robots is:
Lots of machines and few workers = capital-intensive; hand-made crafts are labour-intensive.
Practice
Training and better machines can raise productivity (output per worker).
Higher productivity lowers the cost per unit; training, machines and good management raise it.
Economies & diseconomies of scale
- economies of scale — as output rises, average cost falls (bulk buying, big machines, cheap loans).
- diseconomies of scale — grow too big and average cost rises (hard to manage, slow messages).
- Firms also buy factors of production, whose prices are set by demand and supply.
Practice
Economies of scale mean that, as output rises, the average cost per unit:
Economies of scale lower the average cost; growing too big brings diseconomies (cost rises).
You've got it
Key idea
- labour-intensive (people) vs capital-intensive (machines); productivity = output per worker
- economies of scale lower average cost; too big → diseconomies raise it
- factor prices are set by demand and supply