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Capital-Intensive Production Methods and Profits

Question

Discuss whether or not introducing more capital-intensive production methods will increase a firm’s profits.

Category:

Firm Behavior and Strategies

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Preview Answer

I. 🍃Introduction
- Brief explanation of the topic
- Purpose of the outline

II. Advantages of using machines in production
- 🍃Introduction of the first point: Machines may introduce more advanced technology
- Explanation of how it increases productivity
- Discussion of how higher output means firm benefits from economies of scale
- Explanation of how less workers means lower labour costs
- Discussion of how it may reduce average costs
- Explanation of how it may enable price to be lower
- Discussion of how revenue will rise if demand is elastic
- 🍃Introduction of the second point: Better quality products could be produced
- Explanation of how it increases demand
- 🍃Introduction of the third point: May increase international competitiveness
- Discussion of how it can sell more exports

III. Disadvantages of using machines in production
- 🍃Introduction of the first point: Machines may be expensive
- Discussion of how workers may not be trained in their use
- Explanation of how average costs could rise, reducing gaps between revenue and cost
- 🍃Introduction of the second point: Machines may break down
- Discussion of the consequences of breakdown, e.g. interruptions in supply
- 🍃Introduction of the third point: Initial set-up costs may be high
- Discussion of how profits are reduced in the short-run
- Explanation of how a fall in price may cause revenue to fall if demand is inelastic
- Discussion of how consumers may prefer handmade/personalised products, causing demand to fall
- Explanation of how labour may be in large supply, resulting in low wages
- Discussion of how the government may subsidise firms to employ workers to reduce unemployment

IV. 👉Conclusion
- Summary of the advantages and disadvantages of using machines in production
- Final thoughts on the topic.

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