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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 tourism
forgive Reply
Tourism is travel for pleasure or business
Yusuf
It is the commercial organization and operation of holidays and visits to places of interest.
Nureni
who is a price taker?
sam Reply
A price taker is a person or a company who have no control to dictate a prices of a goods or services
Unique
Someone who sets price
Nureni
In the trading world, a price taker is a trader who does not affect the price of the stock if he or she buys or sells shares.
Nureni
in a common and suitable sense state the law of diminishing returns
Unique Reply
The higher the satisfaction derived from a particular commodity,the lower the demand for it but that law doesn't match in some instances.
Nureni
state the features of an imperfect competitive market
Naomi
@NURENI instance like wat
Unique
imperfect competitive market involves large number of sellers and buyers price makers selling cost product differentiation free entry and exit of a firms
Unique
is economics a science
Alex Reply
yes. a social science.
Carlos
Yes of cause It uses scientific principles in its research. That is to say, analyzing data, making experiment as well as making deductions and drawing conclusions
Aziz
U can understand the scientific nature of economics by learning about the methods used by Abhijit Banerjee(indian) ,the nobel prize laureate 2019.
Harshita
it is considered as a social science
idk
Hence, economics is a science, a social science many can call it, or more appropriately, a young science
Taha
it can be called social science because of behaviour ,which is unpredictable.There r many theroies in economics which make economics a social science But some economic theories makes it science
Harshita
human behaviour*
Harshita
remember science derives from the root words "to know". With that being said most fields of study can be considered as a science or soft science, for they possess key knowledge to attaining understanding of our world.
Alexander
economics is a science cos it deals with human wants, desire or neads in order to satisfy them
Unique
according comparision of political science economic is science.
Hassan
what's the question?
Nureni Reply
Discuss economics system
Henry Reply
discuss institutional system
Henry
Give 3 at most advantages and disadvantages of economics system and institutional syatem
Henry
Give the features characteristics of market or free enterprise
Henry
The structure of an economy is largely determined by the economic system which is a function of the economic ideology of the nation
Nureni
The economic system is grouped into 5 groups: 1: Pure market 2: Developed market 3: Centrally planned or Socialist 4: Mixed market and 5: Market Socialist Economic systems
Nureni
what is inflation
Prince Reply
hello everyone , I'm New here, third degree price discrimination?
Saeed Reply
2nd degree price discrimination?
Saeed
hi
Kini
hi
Mitchel
Hi
MP
price paid by consumers after the sales tax is called?
Pinias Reply
why government impose price floor on certain products?
Pinias
how can black market be occurred when price ceiling is introduced?
Pinias
How can inflation affect goods and services?
Ph
When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected
Joan
If inflation becomes too high the economy can suffer conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases.
Joan
Is it necessary to make decision when it fails you
Evelin Reply
Pls when what fails u
MP
I think so
Kini
well i might naught know what you on about but i gotta tell you, it is necessary
Troy
yep
Ibe
Kk
MP
yep
Ibe
how can the demand side approach solve unemployment
Tshepiso Reply
demand solves unemployment when it is addressed with supply you can't just expect demand to work alone without supply the two are interconnected
Nureni
demand side approach to solve unemployment
Tshepiso Reply
no get ur questions
Ibe
differentiate between choice and scale of preference
ALFRED Reply
choice are the various wants of every individual whiles scale of preference is the list of unsatisfied wants arranged in order of important priority
Kini
choice refers to the act of selecting from alternatives or it refers to the act of choosing one thing instead of the other but Scale of preference refers to the listing of wants in order of important by providing the pressing need on top and the less pressing need at the bottom
Ebenezer
four cardinal types of demand
Henry Reply
what are the types of demand
Henry
they are the derived,complementary,substitute and supplementary demands
Kini
What is equilibrium
Khan
hi
Ayesha
hello
Kini
equilibrium is the state of balance where there is no tendency for a change to occur.
Kini
Derived, competitive, complementary and composite demands
Aziz
Hi
MP
why is economics said to be a dismal science?
Kini
hi friends
Ibe
hello
Owusu
fyn
Ibe
fyn what is meaning of monopoly
Ibe
monopoly is when a particular good is produced without competing with any other good.
Ebenezer
good evening
Tweneboah
draw the market demand curve from the individual demand curve?
Shilpa
With the aid of diagrams,compare the short run equilibrium positions of a perfect competitor and an imperfect competitors
Monlay 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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