Labour, capital, investment and capacity

Investment
1. Definition - any form of capital intended to contribute to future output
2. Can be physical - land premises, and equipment - or human capital such as training and education
3. Investment increases productivity->revenue and spending power raised->more investment
4. Wages increase, which encourages labour-saving investment
5. Technological changes make investment cheaper
6. Increasing capital entails net investment - additions of extra equipment rather than just replacements
  1. Level of profit depends on level of investment; but some large corporations with abnormal profits may not reinvest
7. Standards of living raise over time as capital becomes relatively cheaper as wealth increases
8. It becomes worthwhile to equip workers with more equipment rather than use more workers - more capital intensive production
9. New technologies may only be affordable to the biggest businesses
  1. Case for antitrust rules to spread the availability of technology?
Labour intensive process
1. Some occupations remain labour intensive because of the nature of the work, mostly services such as medical care and hairdressing
  1. These tend to be small firms in more monopolistic markets, as labour intensive production will typically be on quite a small scale
2. Some occupations remain labour intensive because of demand for craftsmanship and artistic flair - these small niche businesses may thrive alongside the larger ones
3. 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.
Market change
1. Much capital is purpose-designed, meaning that when there are changes in demand it may be difficult for capital-intensive businesses to adapt
  1. They can get around this by ensuring their equipment is flexible, for example using computer aided manufacturing
    1. This, however, might increase overall costs
2. Labour intensive production is more flexible, as skills can be adapted easily. However, if markets shift away from products entirely, jobs are lost.
Technological change
1. 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
  1. New technologies introduced -> new processes use more capital -> productivity rises -> costs fall -> prices fall -> sales increase -> new jobs are created
  2. Changing market structures
Capacity utilisation
1. Investment and technological change increase the capacity of business and the economy
  1. How is investment performed? R&D through government or companies themselves?
2. Capacity utilisation measures how much of the maximum possible output is actually produced.
3. If capacity is fully utilised, costs will be minimised but it may be difficult to respond to increases in demand.
  1. However, if slack is kept in the system average costs may rise which might be a problem in a highly competitive market
  2. 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
    1. 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.
      1. Link to marketing strategies
    2. High levels of unemployment suggest that the economy as a whole is working below capacity.
      1. Although not exactly the same as allocative efficiency, this idea can be used in conjunction with it
Efficiency
1. Efficiency is achieved when best possible use is made of all the resources employed in production.
  1. Similar to allocative efficiency
2. Efficient organisation of production processes should contribute to increase output per hour worked.
3. Ultimately, higher productivity allows businesses to cut costs, reduce prices and become more competitive.
  1. However, will cutting costs always be the best pricing strategy?

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Labour, capital, investment and capacity

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	Created by Harry Lewis about 7 years ago