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Analyse why a firm may become more capital-intensive

Quick Answer:

Coherent analysis which might include: The cost of capital may fall / the price of labour may rise (1) lowering costs of production (1) making the firm more price-competitive (1) may increase profits (1). Advances in technology (1) may improve the quality of capital (1) making it more productive / efficient (1) may increase the quality of products produced (1) raise demand for the products produced (1). Firms may want to reduce human error / more consistent quality / uniform products (1) reduce wastage (1). Firms may want to avoid disruption to production (1) caused by industrial action / strikes / sickness (1) capital equipment does not need to take breaks / can work 24 hours a day (1). There may be a shortage of labour (1) making it difficult to recruit workers (1). A government may reduce taxes on capital goods (1) provide subsidies (1) the rate of interest may be reduced (1) making capital goods more affordable (1). The firm’s output may rise (1) reducing the average fixed cost of capital / benefiting from economies of scale (1).

A capital intensive firm is dependent more on capital than labour for its production process.
A firm may use more capital if it is more expensive to hire labor due to higher wages
or there is a shortage of labour, compared to capital that may have a lower cost. This
would allow the firm to lower its cost of production and earn higher profits. It could also
be the case that advances in technology improves the quality of products, making firms
more capital intensive. Governments, to make domestic firms more productive to compete
with international exports, can give subsidies on capital. A subsidy would lower the cost
of acquiring capital, increase firm’s competitiveness, improve the quality of its products
and help in increasing revenues and profits. This can help firms increase the scale of its
operations and benefit from economies of scale. As output increases, the fixed cost of capital
can be spread over a larger number of units, making capital more cost effective. Similarly,
to avoid disruptions caused by labour unions in the form of strikes, higher wage demands,
sick leaves, all these increase costs, reduce productivity and efficiency causing firms to
shift to more capital intensive processes. In addition, firms that want to control human
error and bring uniformity to the quality will focus on being more capital intensive.

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