Unit 1 - Chapter 8

Question 1

Production

Answer 1

Converts inputs or factor services into outputs of goods

Question 2

Productivity

Answer 2

Output per unit of input E.G. labour productivity is output per worker

Question 3

Division of labour

Answer 3

Different workers perform different tasks in the course of producing a good or service. Different workers may also produce different goods or services.

Question 4

Exchange

Answer 4

Specialisation and the division of labour mean that goods and services must be exchanged for each other. Money and the use of barter are mediums of exchange.

Question 5

Specialisation

Answer 5

A worker only performing one task or a narrow range of tasks.

Question 6

Adam Smith’s 3 main reasons why a factory’s total output can be increased by specialisation.

Answer 6

1) Workers don’t need to switch between tasks so time is saved.
2) More and better machinery or capital can be employed (capital widening and capital deepening).
3) Practice makes perfect, workers become more efficient and productive.

Question 7

Average cost

Answer 7

The cost per unit of output.

Question 8

Productive efficiency

Answer 8

Occurs when a firm minimises average costs and produces at the lowest point on its average cost curve.

Question 9

Productive efficiency (for the whole economy)

Answer 9

When the economy is producing on its production possibility frontier.

Question 10

Economy of scale

Answer 10

Falling average or unit costs as a firm increases its size or scale.

Question 11

Types of economy of scale

Answer 11

1) Technical economies of scale
2) Managerial economies of scale
3) Marketing economies of scale
4) Financial or capital-raising economies of scale
5) Risk-bearing economies of scale

Question 12

Managerial economies of scale

Answer 12

Specialised managers

Question 13

Marketing economies of scale

Answer 13

• Bulk buying (buy cheaper)

- Bulk-marketing economies (negotiation powers with wholesalers)

Question 14

Financial or capital-raising economies of scale

Answer 14

Lower rate of borrowing

Question 15

Risk-bearing economies of scale

Answer 15

Less exposed to risk

Question 16

Technical economies of scale

Answer 16

1) Indivisibilities
- There is a certain minimum size below which things cannot efficiently operate.
2) Spreading of research and development costs
3) Volume economies
- Bigger storage more efficient then small
4) Economies of massed resources
- Proportionately fewer spare parts needed for many machines
5) Economies of vertically linked processes
- Output of one plant creates input for next plant if firm has all plants together this is more efficient.

Question 17

Diseconomy of scale

Answer 17

Rising average unit costs as a firm increases its size or scale

Question 18

Internal economies of scale

Answer 18

Occur when a firm grows and changes its scale and size.

Question 19

External economies of scale

Answer 19

Occur when a firm’s average or unit costs of production fall because of the growth of the industry or market of which the firm is a part.