Question

Explain the following factors affecting the fixed capital requirements of a company :

(i) Choice of technique

(ii) Growth prospects

Hint:

For each factor, say which situation needs more fixed capital and which needs less, with a reason.

Answer 1

Step 1: Understand the question:
Fixed capital is the money put into long-term assets such as machines and buildings.
We explain how two factors, choice of technique and growth prospects, change the need for it.

Step 2: (i) Choice of technique: the idea:
A firm may choose a capital intensive technique, which uses more machines and fewer workers.
It may also choose a labour intensive technique, which uses more workers and fewer machines.

Step 3: (i) Choice of technique: the effect:
A capital intensive firm needs a large investment in plant and machinery, so its fixed capital requirement is high.
A labour intensive firm needs less machinery, so its requirement is low.

Step 4: (ii) Growth prospects: the idea:
Growth prospects mean the expected growth in the size of the business.
A firm that expects fast growth must build more capacity in advance.

Step 5: (ii) Growth prospects: the effect:
Higher growth prospects need larger investment in fixed assets such as plant, so the requirement rises.
A firm with poor growth prospects keeps its fixed capital small.

Final Answer:
A capital intensive technique and strong growth prospects raise the fixed capital requirement. Labour intensive methods and poor growth keep it low.