The Economics of production (week 3) Flashcards
What is an entity?
an individual worker in a firm
What is economic specialisation?
a method of product, where an entity focuses on a limited scope of activities to gain a greater degree of efficiency in production
What can specialisation in the production of goods and services lead to?
increases in productivity
What is an example of specialisation?
Henry Ford’s use of the assembly line in his factories to increase the productivity of producing motor cars in 1920s
What is the Assembly line?
manufacturing process where groups of workers specialise in producing only a specific component of the final product
each component when produced is assembled together to produce the final product
What are productivity increases caused by?
learning by doing
differences in ability
economies of scale
How does learning by doing increase productivity?
workers are able to acquire skills that make them much more adept at their job, therefore productivity increases
How does differences in ability increase productivity?
some people are better at some activities than others
How do economies of scale increase productivity?
it is cost-effective to expand the scale of operations
In what 2 ways do economists distinguish who is better at doing what?
1) Absolute advantage
2) Comparative advantage
What is absolute advantage?
you are seen to have this if you can produce the same quantity of a good with fewer inputs compared to another person
eg labour hours
What is comparative advantage?
workers differ in their ‘relative ability’ to do things as well as their absolute ability
What generates comparative advantage?
the differences in relative ability
What do economists use to determine comparative advantage?
the opportunity cost of an action (the benefit that is forgone by taking the action)
What is the opportunity cost of a full time university student?
the foregone earnings that the student could have made if they weren’t a student and worked full time instead
If Greta has a lower opportunity cost in the production of good X than Carlos, then what advantage does she have?
comparative advantage in the production of good X
Summary points so far (the economics of production) (3)
people always have a comparative advantage in something, even if they have no absolute advantage
comparative advantage is a dynamic concept - it can be acquired over time
overall output is maximised by specialisation according to comparative advantage and then trading on a market
What do we assume when firms choose a method of production?
assume that the firm aims to minimise the cost of production
What is cost minimisation?
a necessary but not sufficient condition for profit maximisation
What does an isoquant show?
all possible combinations of inputs that can produce a given efficient level of output
where the inputs are labour and capital
What do the different points on the isoquant represent?
different production techniques
In order to choose the right technique from the different production techniques represented by the Isoquant, what do we need to know?
how much a given technique costs
this info is given by the Isocost line
What does the Isocost line show?
the different input combinations with the same total cost
What is the downward sloping straight line of the Isocost line?
the relative price of the two input factors
What is the equation of the isocost line?
Total Cost = wL + rK
where w = wage rate
where r = price of renting capital
What is the slope of the isocost line also known as?
-r/w
interest rate / wage rate
reflects the relative price of the two factors of production
How would you use the isocost line to decide which specific technology to use?
choose the lowest isocost line
this is the only line that is tangent to the isoquant curve
the point of tangency becomes the combination of labour and capital that the firm chooses
What are the consequences of change in the price of inputs? (2)
1) an increase/decrease in the relative price of capital will increase/decrease the slope of the isocost line and so will make less/more capital intensive techniques more attractive
2) the point of tangency now means that the marginal rate of technical substitution is equal to the relative prices of inputs
