Impact of Automation on Production Costs and Labor Compensation

ECON1020 PRINCIPLES OF ECONOMICS 1 | S2 2020
Department of Economics
INDIVIDUAL
otal Marks 50 | Weighting 30%
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ECON1020 PRINCIPLES OF ECONOMICS 1 | S2 2020
Department of Economics
BACKGROUND
Automation, broadly referring to the adoption of machines and computers in the production
process has become increasingly more popular across many sectors and countries. For example, the
market for industrial robots has experienced a dramatic expansion in the last couple of decades, as
shown in Figure 1.
Figure 1 Annual
shipments of
industrial robots
worldwide
(thousand units)
Source: Modified
from Exhibit
2 , McKinsey &
Company,
Industrial Robotics:
Insights into the Sector’s Future Growth Dynamics, July 2019.
Note: Forecast 2018-2021
At the same time, the prices of labour and robots have been changing. The case of the US
manufacturing sector in the last few decades is shown in Figure 2.
Figure 2: Robot prices and
labour compensation in
manufacturing in the US
(1990=100)
Source: Tilley, Jonathan,
“Automation,
Robotics, and the Factory of the
Future”,
September 7, 2017, McKinsey &
Company.
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MACQUARIE
BUSINESS SCHOOL ECON1020 PRINCIPLES OF ECONOMICS 1 | S2 2020
Department of Economics
Now, consider Bruno, who owns a small manufacturing firm and produces windscreens for
automobiles. Currently Bruno uses two robots and ten workers including Angela in his production.
Answer the following questions based on the topics covered in the lectures from weeks 1-6.
[Question 1] Based on the information in Figure 2, illustrate in a diagram how Bruno would
decide to use more robots in his firm to minimise production costs. Your diagram should have the
number of workers on the horizontal axis and the number of robots on the vertical axis. It is not
necessary to use specific numbers. [5 marks]
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1 2 3 4 5 6 7 8 9
0
2
4
6
8
10
12
14
Number of workers
Number of robots

ECON1020 PRINCIPLES OF ECONOMICS 1 | S2 2020
Department of Economics
[Question 2] Explain in 100-130 words why the market for industrial robots have expanded in the
last couple of decades as shown in Figure 1. You must refer to the information from Figure 2 and
the diagram you drew in the previous question. [5 marks]
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The market of industrial robots has expanded in the last couples of decades due to rise in the labor
cost. As shown in Figure 2, the cost of labor is continuously increasing and the cost engaged in
producing industrial robotics is continuously decreasing due to enhancement in technology and
economies of scale. Another reason of expanding the market of industrial robots is the continuous
enhancement of technology which are making industrial robots relevant and appropriate for each
organization. The higher production power is also a reason considering which this market is
expanding as industrial robots can fill the gap of human mistakes.