Activity 2(i)

Activity 2i:

How artificial intelligence might affect the allocation of resources

  1. Labour resources refer to the mental and physical effort by humans in the production process. In contrast, capital resources are made by humans using natural resources to become more sophisticated machinery that can be used to make other goods and services. Labour is associated with the efforts of people where capital is made by people and later used in the production process.
  2. Al may reduce costs of production due to significant productivity increases. The Al may learn faster, suffer less breakdowns, will not take breaks or holidays and therefore this leads to greater output per hour. As the cost of Al falls over time, more firms may substitute labour with capital, changing how goods and services are produced.
  3. With driverless cars and trucks, the need for human drivers could be significantly diminished, resulting in a significant reduction in the allocation of labour resources to these areas of production. Futurists also predict less accidents due to human error, so the allocation of resources towards repairs and injuries might also be reduced. It is hard to know how these resources will be reallocated towards.  Al might result in an excess supply of labour and significant increases in unemployment. When there is an excess supply of labour there will tend to be downward rather than upwards pressure on price (wages in this case). There will be decreased competition for labour and firms will be increasingly willing and able to replace labour with capital. This may make it harder for workers to bargain for a pay rise. The labour market demand and supply diagram would show a shift of the LD curve to the left as capital is used instead (price of substitute.
  4. Fracking increased the supply of available fossil fuel energy, including oil. This led to a surplus at the existing price and the market responded with an immediate decrease in price.
  5. Research Question —