Labour, capital, investment and capacity

Labour, capital, investment and capacity

1. Investment

   • Definition - any form of capital intended to contribute to future output
   • Can be physical - land premises, and equipment - or human capital such as training and education
   • Investment increases productivity->revenue and spending power raised->more investment
   • Wages increase, which encourages labour-saving investment
   • Technological changes make investment cheaper
   • Increasing capital entails net investment - additions of extra equipment rather than just replacements
     • Level of profit depends on level of investment; but some large corporations with abnormal profits may not reinvest
   • Standards of living raise over time as capital becomes relatively cheaper as wealth increases
   • It becomes worthwhile to equip workers with more equipment rather than use more workers - more capital intensive production
   • New technologies may only be affordable to the biggest businesses
     • Case for antitrust rules to spread the availability of technology?

2. Labour intensive process

   • Some occupations remain labour intensive because of the nature of the work, mostly services such as medical care and hairdressing
     • These tend to be small firms in more monopolistic markets, as labour intensive production will typically be on quite a small scale
   • Some occupations remain labour intensive because of demand for craftsmanship and artistic flair - these small niche businesses may thrive alongside the larger ones
   • Developing countries have little capital equipment, but labour is cheap. People have no disposable income to spend on capital, so employers keep these costs to a minimum and employ more people.

3. Market change

   • Much capital is purpose-designed, meaning that when there are changes in demand it may be difficult for capital-intensive businesses to adapt
     • They can get around this by ensuring their equipment is flexible, for example using computer aided manufacturing
       • This, however, might increase overall costs
   • Labour intensive production is more flexible, as skills can be adapted easily. However, if markets shift away from products entirely, jobs are lost.

4. Technological change

   • New technologies can facilitate capital intensive mass production, for example computers, which used to be a niche market but are now mass produced for all
     • New technologies introduced -> new processes use more capital -> productivity rises -> costs fall -> prices fall -> sales increase -> new jobs are created
     • Changing market structures

5. Capacity utilisation

   • Investment and technological change increase the capacity of business and the economy
     • How is investment performed? R&D through government or companies themselves?
   • Capacity utilisation measures how much of the maximum possible output is actually produced.
   • If capacity is fully utilised, costs will be minimised but it may be difficult to respond to increases in demand.
     • However, if slack is kept in the system average costs may rise which might be a problem in a highly competitive market
     • If demand is insufficient, there will be under-utilised capacity. This means that fixed costs are shared across a lower level of output and therefore average fixed costs will rise
       • A business may try to increase its productivity in this scenario by diversifying or using aggressive market strategies. If demand seems stuck below capacity, capacity will have to be cut.
         • Link to marketing strategies
       • High levels of unemployment suggest that the economy as a whole is working below capacity.
         • Although not exactly the same as allocative efficiency, this idea can be used in conjunction with it

6. Efficiency

   • Efficiency is achieved when best possible use is made of all the resources employed in production.
     • Similar to allocative efficiency
   • Efficient organisation of production processes should contribute to increase output per hour worked.
   • Ultimately, higher productivity allows businesses to cut costs, reduce prices and become more competitive.
     • However, will cutting costs always be the best pricing strategy?

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