Final answer:
The capacity of production is limited by the process technology available and the disposition of the workforce. Firms opt for technology that allows producing at the lowest cost to maintain competitiveness and profitability. Choices between labor and physical capital often reflect their substitutability in the production process.
Step-by-step explanation:
The capacity of production is dictated by both the process technology and the workforce's disposition in a business context. This scenario is critical in businesses since it impacts their ability to produce at the most cost-effective levels and influence profitability. In particular, technology encompasses various methods of combining inputs to generate outputs, not just innovative gadgets like tablet computers. Firms will aim for the production technology that enables them to produce the required output level at the lowest cost to maximize profits, given revenues remain constant.
Companies are confronted with decisions that pit physical capital against labor. They might need to choose between multiple small machines requiring individual workers or opt for larger, costlier machines operated by fewer people. Such choices are necessary because investing in different types of physical capital can lead to a reduced need for labor; this is a prime example of how these two factors can substitute for each other in the production process.
Moreover, it's essential for companies to consider low-cost production methods to stay competitive. If they fail to do so, there is a risk of losing sales to competitors who can produce and sell for less. This competitive environment forces firms to continually analyze and optimize their production technologies and labor strategies.