Study notes

Capital and Labour Intensity

The production operations of any business combine two factor inputs:

  • Labour – i.e. management, employees (full-time, part-time, temporary etc)
  • Capital – i.e. plant & machinery, IT systems, buildings, vehicles, offices

The relatively importance of labour and capital to a specific business can be described broadly in terms of their "intensity" (or to put it another way, significance).

  • Labour-intensive production relies mainly on labour
  • Capital-intensive production relies mainly on capital

Sounds simple! Some examples will help reinforce the point:

Labour intensive

  • Food processing (e.g. ready meals)
  • Hotels & restaurants
  • Fruit farming / picking
  • Hairdressing & other personal services
  • Coal mining

Capital intensive

  • Oil extraction & refining
  • Car manufacturing
  • Web hosting
  • Intensive arable farming
  • Transport (airports, railways etc)

The main features of each category can also be summarised as follows:

Labour intensive operations

  • Labour costs higher than capital costs
  • Costs are mainly variable in nature = lower breakeven output
  • Firms benefit from access to sources of low-cost labour

Capital intensive operations

  • Capital costs higher than labour costs
  • Costs are mainly fixed in nature = higher breakeven output
  • Firms benefit from access to low-cost, long-term financing

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