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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 is meant by broadening the tax base?
Fiona Reply
What is scarcity.
Npoanlarb Reply
when there is adequate resources
the represent inadequacy of resources relative to the needs of individuals
why our wants are limited
Npoanlarb Reply
nooo want is unlimited but resources are limited
and do to that there occurs scarcity and we have to make choice in order to have what we need if need be I will explain more
our wants are not limited but rather the resources
as we know that there are two principle of microeconomics scarcity of resources and they have alternative uses...
yes .....
because our resources are limited./we have a limited resources.
what is demand
Thank Reply
demand is something wt we called in economic theory of demand it simply means if price of product is increase then demand of product will decrease
inverse relationship between demand and price
in microeconomic
demand is what and how much you want and what's your need...
how can one be so with economics even while you have less knowledge in mathematics.
why is it that some products increases everyday by day
Chiamaka Reply
because demand is increase
because demand is increase
but how demand increases?
Because of the Marketing and purchasing power of people.
but how could we know that people's demands have increased everyday by day and how could we know that this is time to produced the products in the market. Is any connection among them
for normal good people demand remain the same if price of product will increase or not
see that some product which increases day by day is comes under normal good which is used by consumer
Seems hot discussing going here
If there are less products demand starts to increase for those products
Economics is really interesting to learn ....
see there is Inferior goods ands normal goods inferior good demand is rarely increase whereas as we talk about normal good demand will absolutely Increase whether price is increase or not
and demand for normal goods increase cause people's income as a while increases time to time
and it might also be that the cost of raw materials are high.
may be
obviously because demand is increasing.....and price is getting low.....
hmmm there is inverse relationship between demand and price
This is because the supply of those products in relation to raw materials are decreasing and they are also necessities. This crate shortage in the market, so sellers will rise the prices of those products.
Importance of economics
Odunayomi Reply
the nature and significance of economics studies
What is demand
Shuaib Reply
deman is amount of goods and services a consumer is willing and able to buy or purchase at a given price.
the willingness and ability of a body to purchase goods nd servicesbis called demand ,so if she/has ability but doesn't have willingness it's not a demand same if she or he has willingness but doesn't has ability it's not a demand too
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time and demand can also be defined as the desire or willingness and backed by the ability to pay.
What is Choice
Choice refers to the ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options. Being free to chose is regarded as a fundamental indicator of economic well being and development.
choice is a act of selecting or choosing from the numerous or plenty wants.
demand is want and it is also what you need and able to afford a particular period of time... because demand changes with time.
Demand refers to the ability of the consumer to pay for a particular product at a given price
how does consumer make profit
Clifford Reply
by buying goods in bulk.
Compare and contract the function of commercial bank and the central bank of Nigeria
Akwi Reply
what do think is the difference between overhead costs and prime cost
what is economics
Mohamed Reply
economics is a social science that study's how resources can be used to produce goods and services for society
Economic is a science which studies human behavior as a relationship between ends and scares means which have alternatives uses or purposes.
what is economics
Mohamed Reply
what is the basic economic problem
John Reply
unlimited wants vs limited resources
what economics is all about?
Nomuhle Reply
what is a new paradigm shift
Austen Reply
Paradigm shift it is the reconcilliation of fedural goods in production
fedural? what is that?

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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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