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Production technology 1 uses the most labor and least machinery, while production technology 3 uses the least labor and the most machinery. [link] outlines three examples of how the total cost will change with each production technology as the cost of labor changes. As the cost of labor rises from example A to B to C, the firm will choose to substitute away from labor and use more machinery.

Total cost with rising labor costs
Example A: Workers cost $40, machines cost $80
Labor Cost Machine Cost Total Cost
Cost of technology 1 10 × $40 = $400 2 × $80 = $160 $560
Cost of technology 2    7 × $40 = $280 4 × $80 = $320 $600
Cost of technology 3    3 × $40 = $120 7 × $80 = $560 $680
Example B: Workers cost $55, machines cost $80
Labor Cost Machine Cost Total Cost
Cost of technology 1 10 × $55 = $550 2 × $80 = $160 $710
Cost of technology 2    7 × $55 = $385 4 × $80 = $320 $705
Cost of technology 3    3 × $55 = $165 7 × $80 = $560 $725
Example C: Workers cost $90, machines cost $80
Labor Cost Machine Cost Total Cost
Cost of technology 1 10 × $90 = $900 2 × $80 = $160 $1,060
Cost of technology 2    7 × $90 = $630 4 × $80 = $320 $950
Cost of technology 3    3 × $90 = $270 7 × $80 = $560 $830

Example A shows the firm’s cost calculation when wages are $40 and machines costs are $80. In this case, technology 1 is the low-cost production technology. In example B, wages rise to $55, while the cost of machines does not change, in which case technology 2 is the low-cost production technology. If wages keep rising up to $90, while the cost of machines remains unchanged, then technology 3 clearly becomes the low-cost form of production, as shown in example C.

This example shows that as an input becomes more expensive (in this case, the labor input), firms will attempt to conserve on using that input and will instead shift to other inputs that are relatively less expensive. This pattern helps to explain why the demand curve for labor (or any input) slopes down; that is, as labor becomes relatively more expensive, profit-seeking firms will seek to substitute the use of other inputs. When a multinational employer like Coca-Cola or McDonald’s sets up a bottling plant or a restaurant in a high-wage economy like the United States, Canada, Japan, or Western Europe, it is likely to use production technologies that conserve on the number of workers and focuses more on machines. However, that same employer is likely to use production technologies with more workers and less machinery when producing in a lower-wage country like Mexico, China, or South Africa.

Economies of scale

Once a firm has determined the least costly production technology, it can consider the optimal scale of production, or quantity of output to produce. Many industries experience economies of scale. Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. This is the idea behind “warehouse stores” like Costco or Walmart. In everyday language: a larger factory can produce at a lower average cost than a smaller factory.

Questions & Answers

what are free good
Maillot Reply
how do you determine price change
Matri Reply
what is economics?
Yaya Reply
what is economic
Nana Reply
Economics is the study of how Individual consumer, institution and society as a whole uses its available finite resources to satisfy infinite needs and wants
Richard
Explain the following concepts using suitable exemple. 1) National budget. 2) National debt
Rosalie
what is international trade
BOBO Reply
other things remain constant.
Esale Reply
explain scarcity
Richard Reply
scarcity occurs when there are not enough resources to satisfy human's needs and wants therefore we need to allocate our resources using the price mechanism.
Isha
scarcity is when there is inadequate resources to catch the unlimited wants which would compel individual to make choice.
Prince
scarcity simply means when there's a shortages of resources to satisfy Hunan's need and wants in a particular time, which means the demand for it at the moment is higher than the supply
Abu
scarcity simply means when there's a shortages of resources to satisfy humans need and wants in a particular time, which means the demand for it at the moment is higher than it supply.
Abu
😂😂😂
Isha
That escalated real quick😂
Isha
scarcity is sometimes considered as the basic problems of economics resources r scarce because we live in a world of humans in which wants are infinite but the land labor and capital r required to satisfy those wants are limited
Nkwenti
scarcity means unlimited resources
Rena
resources are limited but human wants can not be limited
Himanshu
joint or complementary demand
Ryt Reply
what is demand
Qudus Reply
it maybe define as the amount or quantity of goods and services which a consumer is willing to buy with the ability to pay at a given price at a particular time
Habib
yesoo thanks dear
Gyamfua
Explain 3 reasons why the manufacturer may decide to sell directly to the consumers
Rosalie
why is economics a science
Isaac Reply
Because science is all about thinking by making models whether a computational or Mathematical. Economics is a social sciences because it effects society but to understand Economics we use maths so it is a Science
Amit
hi
Mony
hello
Amit
I hope.......Economic is social science because it makes new new currency of money,it is decided the country’s depend system and the system be repeated others benefits in our ...
Anik
yeah
Habib
so what is the disadvantages of mix economic system
Habib
Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations.
Ali
The question is: why is Economic a "science" and not why is economics a "social science?" Alright folks?
Xavier
In my own understanding of why economics is a science it bcz it deals mainly on human resources just like biology that deals in the human body why economics is science it also deals on the management of human resources all over the world bcz without economics there will be no human resources
Ogbonnaya
what is technology
Nkwenti
my response to the earlier question is, economics is a science but not a pure science like biology, chemistry and physics. The reason is that those pure science study inanimate object while economics study human being, their experiment are predictable.
raimi
Economics is a social science subject that shows the relationship between ends and scarce means with their alternative uses
Ajenifuja
what is Equilibrium?
Fatima Reply
it means equal price and equal quality
Arthur
thank u Arthur!
Fatima
😇🙏
Fatima
Thanks
Moses
Equilibrium is a state of balance in an economy. In as far as market forces are reasonably concerned, equilibrium means the state at which the quantity of goods supplied is equal to the quantity of goods demanded.
Xavier
what is labour
Ayham
labor can be define as a both physical and mental effort of man put forward towards production
Habib
name the types of demand and explain any two
ALIMAMYISLA
Joint demand Composite demand Competitive demand
Ajenifuja
Labourcan be defined as man mental and physical exertion
Ajenifuja
equilibrium is a state of balance especially between opposing forces or influences
Nkwenti
equilibrium means the state of point in which a person is satisfied and after that point if that person consumes more than the satisfaction level will decrease.
Himanshu
Equilibrium is a state of balance in and economy. that mean equal privé and equal quality e.t.c.
Rosalie
Equilibrium is a situation in which economic forces such as supply and demand balance and in the absence of extremal lnfiuences the values of economic variables will not change.
Gyamfua
what is elasticity
Motseoa Reply
difference between demand and supply
Adeyemi Reply
Demand- It is the desire of a buyer and his ability to pay for a particular commodity at a specific price. Supply- It is quantity of a commodity which is made available by the producers to its consumers at certain price.
Ali
yes OK thank you dear
Gyamfua
Demand can be defined as the ability a buyer is willing and able to pay at a specific price and in agiven period of time Supply can be defined as the ability the producer is willing to supply with a specific price
Ajenifuja
thanks
antony
what is labor force
Habib
demand represents the consumer while supply represents the firm
Nkwenti
restriction on international trade
Ayim Reply
formula for price elasticity of demand
Lognyuu Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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