Question

Using your current or former place of business as an example, discuss the main factor inputs to the business – labor and capital. Is the business labor intensive or capital intensive? Can one factor be substituted for another and what would the trade-offs be? Does the business experience diminishing marginal returns in production and/or are there any returns to scale? Does the blend of labor vs. capital have any impact on the business’ costs or cost structure (fixed vs. variable)?

Answer 1

Considering the example of banking industry, Both labor and capital are employed in banks. Even though digitization has increased the amount of capital employed in banks, however, labor employed has not fallen as best customer services are provided by labor. The business was labor intensive but increased digitization is making the banking process capital intensive. No, one factor cannot be substituted for another as both are complements in banking industry. Yes, the industry does observe diminishing marginal returns in production because increase in labor above a certain limit leads to congestion and thus one become hurdle in other person's work. Yes, the blend has reduced the total cost of production in the business. Replacement of some of the work done by labor by capital has reduced overall cost as investment in capital is one time investment while labor has to be paid periodically.