Economics

Question 1

Economies of scale

Answer 1

Making something once costs a lot as one needs to buy the machinery, materials, and energy. In theory, it should be cheaper to make 1000, because whilst one still needs to pay for the materials and energy, they can use te same equipment, bringing the cost per unit down.

This is true for limited amounts but falls short with increased output and time. In the short term, it does not take into account maintenance and eventual replacement of the machinery. It also does not consider the effectiveness of using the same machinery to make 1 to make 10000, as more costly equipment will likely be chosen. Finally, at the large marco-economic level, creating so much of a product will increase the demand for energy and materials, driving up the price.

Question 2

Induced demand

Answer 2

“Build it and they will come”. This is not strictly true as correlation does not prove causation. For example, car ridership is not proportional to highway construction. Highway construction will always impact it as it decreases the opportunity cost of driving. This weighs up the convenience, mobility, and privacy of a car against the costs of petrol and car maintenance, and traffic. Highway construction has an impact on this as it decreases traffic, decreasing the opportunity cost, but this is not significant.

The only significant way to reduce the number of drivers is to impose a congestion charge and make it more costly to drive, decreasing the opportunity cost.