Question

State any two limitations of capital intensive technique.

Hint:

Remember the trade-offs: Capital-intensive means high fixed costs but low variable costs, leading to high risk but high potential profit. Labor-intensive is the opposite: low fixed costs but high variable costs, leading to lower risk but often lower scalability.

Answer 1

A capital-intensive technique of production is one that relies heavily on machinery and technology (capital) rather than on human labor. While it offers benefits like high volume and consistency, it also has significant limitations. Two major limitations are:

High Initial Investment and Fixed Costs: This technique requires a massive initial investment to purchase expensive machinery, equipment, and technology. This creates a high degree of financial risk. Furthermore, it results in high fixed costs in the form of depreciation, insurance, and maintenance. If demand for the product falls, the company still has to bear these high fixed costs, which can lead to substantial losses.

Inflexibility and Risk of Obsolescence: Capital-intensive systems are often designed for mass production of a standardized product and are highly inflexible. It is difficult and costly to change the production process to accommodate changes in product design or consumer preferences. Additionally, there is a constant risk that the expensive technology will become obsolete due to rapid technological advancements, forcing the company to make further heavy investments to stay competitive.