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Reasons for Firms Becoming More Capital-Intensive


Consumers in Uruguay are eating more processed foods. Factors of production, including enterprise, have responded to this change. Firms in the processed food industry have become more capital-intensive. All of Uruguay’s industries were affected by the rise in its inflation rate, from 6.2% in 2017 to 7.7% in 2018

Analyse why a firm may become more capital-intensive (6 Marks)


Firm Behavior and Strategies


Preview Answer

(Step 1: Define 'capital-intensive' in the introduction)

In a capital-intensive firm, major costs occur from investments in equipment, machinery, or other expensive capital assets. There has been a trend for firms to make their processes more capital intensive to the point where some major activities, such as food processing, can largely be done by robots and computer-controlled machinery.

(Step 2: Give reasons why a firm may become more capital intensive)

There are several reasons why a firm may be encouraged to become more capital intensive:

🤖 A firm may become more capital intensive to lower its cost of production

The cost of capital may be cheaper compared to the cost of labour. Furthermore, a capital intensive production process will increase efficiency and reduce wastage. The firm will benefit from an overall fall in the cost of production. This will enable it to sell at a more competitive price and increase its profit margin.

🤖 A firm with capital intensive production processes may benefit from better efficiency and an increased production capacity

A capital intensive production is more efficient. There will not be any costly production backlogs due to sicknesses, strikes or breaks. Not only can capital equipment produce more output in an hour, but it can also work for longer hours, up to 24 hours a day. Furthermore, wastage can be reduced, and the firm will be able to produce more output. Consequently, the firm will benefit from economies of scale and will be able to reduce the average fixed cost of capital.

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