The production process
Production involves transforming inputs (raw materials, labour, capital and entrepreneurship) into outputs (goods and services). Firms organise production by choosing the appropriate combination of factors and technology to minimise costs and maximise efficiency.
Labour‑intensive vs capital‑intensive production
In labour‑intensive production, firms use a high proportion of labour relative to capital. Examples include agriculture and handmade crafts. Capital‑intensive production uses more machinery and equipment relative to labour, such as in car assembly and chemical manufacture. The choice depends on the nature of the product, relative factor costs and the scale of operation.
| Aspect | Labour‑intensive | Capital‑intensive |
|---|---|---|
| Definition | Uses relatively more labour input than capital | Uses relatively more machinery and equipment than labour |
| Advantages | Lower initial investment; flexible workforce; creates employment | Higher productivity; consistent quality; lower long‑run average costs (economies of scale) |
| Disadvantages | Higher unit costs if wages are high; quality may vary; limited economies of scale | High upfront costs; risk of technological obsolescence; may displace workers |
| Examples | Fruit picking, tailoring, restaurant services | Oil refining, car manufacturing, microchip production |
Productivity and division of labour
Productivity measures output per unit of input (e.g. output per worker). Firms can raise productivity through training, better technology, and reorganising work. Division of labour involves breaking down production into specialised tasks performed by different workers. This increases efficiency because workers become skilled at a particular task and less time is wasted switching between jobs.
Economies and diseconomies of scale
As firms grow, they may experience economies of scale – reductions in average cost due to factors such as bulk buying, specialisation, and the use of more efficient capital equipment. However, beyond a certain size, diseconomies of scale can arise if the organisation becomes too complex to manage effectively, leading to rising average costs.
Examples and applications
An artisan workshop producing handmade pottery is labour‑intensive. Craftspeople shape each piece by hand, and the business relies on their skill and creativity. Unit costs may be higher, but customers value the unique designs and are willing to pay more. By contrast, a smartphone factory is highly capital‑intensive. Robots and automated assembly lines produce thousands of phones each day with precise consistency. The high initial investment in machinery is offset by lower unit costs and economies of scale.
Division of labour is evident in fast‑food restaurants. One worker takes orders, another prepares sandwiches, and another fries chips. Specialisation allows each employee to become efficient at their task, speeding up service and reducing waiting times. However, too much specialisation can make work monotonous and may reduce flexibility if a worker is absent.
Economies of scale are enjoyed by large retailers like supermarkets that buy products in bulk and negotiate discounts with suppliers. Small corner shops may have higher average costs and therefore charge higher prices. Diseconomies of scale can arise when a firm becomes so large that communication breaks down and managers lose control, leading to inefficiency.
