Cambridge International as and a level Economics Ebook

149
Chapter 7: The price system and the microeconomy 

---

Number of 
workers
Total 
product
Marginal 
product
Average 
product
0
0
0
100
1
100
100
80
2
180
90
60
3
240
80
40
4
280
70
15
5
295
59
11
6
306
51
Table 7.3 
Production data
have to make concerns the relative mixture of labour and 
capital. Th
erefore the task for the fi rm is to fi nd the least 
cost or most effi
cient combination of labour and capital for 
the production of a given quantity of output.
Clothing is a typical example of a business where labour 
and capital are in direct competition with each other. If 
labour costs are relatively cheap, as in developing and 
emerging economies, then the production process is likely 
to take place using much more labour than capital. In most 
developed economies, however, the reverse is true. High-tech 
machines can oft en be used to replace labour, largely because 
it is more cost eff ective to do so. So, in this case, the same 
amount of output is produced using more capital and far less 
labour than if it were taking place in a developing economy.
Firms therefore have to choose between alternative 
production methods. Returning to the case of the clothing 
manufacturer, 
Figure 7.5 
shows three diff erent methods 
of production, each of which combines diff erent levels 
of labour and capital to make items of clothing. Line A 
shows a method whereby labour and capital are used in 
equal proportions; line B shows a production method that 
uses twice as much capital as labour and line C shows 
the output resulting from twice as much labour as capital 
being used. On these lines, points 
X, Y
and 
Z
show the 
respective amounts of labour and capital that are needed 
to produce 100 units of clothing. If we join these points, 
then it gives us what is known as an 
isoquant,
a curve that 
joins points that give us a particular level of output. Th
is 
isoquant can of course be extended for other combinations 
of labour and capital not shown on 
Figure 7.5
.