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UNIT 1

Markets & Market Failure

1.3

Production and Efficiency

Test 1

Specialisation results in each of the following with the exception of…

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self sufficiency self sufficiency

increased output increased output

higher living standards higher living standards

higher incomes higher incomes

The last three are the consequences and advantages of specialisation. Self sufficiency, on the other hand, is not possible for specialist workers who depend on exchanging the products of their specialism with that of other specialist producers.

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AQA AS Economics Unit 1 – Markets & Market AQA AS Economics Unit 1 – Markets & Market FailureFailureQuestion 1Question 1

The benefits of specialisation depend on …

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more competitive businesses that have focused on producing better products

more competitive businesses that have focused on producing better products

the use of money as a means of exchange the use of money as a means of exchange

increased use of technology, which reduces average costs increased use of technology, which reduces average costs

managing inflation successfully managing inflation successfully

Specialisation requires us to engage in exchange, and money is a more efficient medium of exchange than relying upon barter (the direct exchange of goods/services without the medium of money).

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Which one of the following statements is not a reason why money is a more efficient medium of exchange than barter?

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Money provides a common measuring rod of value Money provides a common measuring rod of value

The value of money is stable The value of money is stable

Money is portable and divisible Money is portable and divisible

Money overcomes the problem of the double coincidence of wants Money overcomes the problem of the double coincidence of wants

A general rise in prices (a process known as inflation) means that the value of money is definitely not stable. What we could say is that price stability is desirable in terms of permitting money to function as an efficient means of exchange, but even with some inflation, money is still a more efficient medium of exchange than barter.

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Division of labour requires an efficient means of exchange because…

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specialist workers are not self sufficient specialist workers are not self sufficient

specialist workers achieve high productivity specialist workers achieve high productivity

specialist workers produce a surplus specialist workers produce a surplus

exchange is not possible without the use of money as a medium of exchange

exchange is not possible without the use of money as a medium of exchange

A specialist worker does not produce the full range of goods and services that he / she requires. Therefore, specialists must engage in exchange – goods for goods, goods for money, labour services for money, and so on. B and D are valid statements but do not explain why specialists need to engage in exchange. C is an incorrect statement – exchange can occur without the use of money.

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The extent of division of labour is determined by…

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the size of the market the size of the market

the productive efficiency of the economy the productive efficiency of the economy

the productivity of labour the productivity of labour

the profits of the enterprise the profits of the enterprise

The larger the market the greater the opportunities for division of labour.

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Which of the following statements is incorrect?

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Production refers to the total output of goods in the economyProduction refers to the total output of goods in the economy

Production refers to the total output of goods and services in an economyProduction refers to the total output of goods and services in an economy

Production is the means by which consumer wants are satisfiedProduction is the means by which consumer wants are satisfied

Production is the process whereby inputs are converted into outputsProduction is the process whereby inputs are converted into outputs

The term production covers both goods and services.Incorrect


A 5% rise in the workforce in a factory led to a 4% increase in the output of goods. From this we can conclude that…

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both output and productivity increased both output and productivity increased

productivity increased but output fell productivity increased but output fell

both production and productivity fell both production and productivity fell

production increased but productivity fell production increased but productivity fell

We are told that output or production rose, which rules out B and D. As output rose by less than the workforce then productivity must have fallen.

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Labour productivity is defined as…

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how many items a workforce produces how many items a workforce produces

the value of the output a business produces the value of the output a business produces

the average cost of employing someone the average cost of employing someone

the output per person per period of time the output per person per period of time

Productivity is output per unit of input and so labour productivity is output per worker per time period (day, shift, week, or year).

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A production manager has noted higher labour productivity in the factory and, therefore, can confidently look forward to

…

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reduced cost per unit made reduced cost per unit made

increased sales increased sales

lower total costs lower total costs

more hours being worked more hours being worked

If employees produce more per hour then wage costs are spread more thinly over a given wage. This will lead to a fall in average costs.

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Which one of the following will cause a fall in the productivity of labour?

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A reduction in the size of the workforceA reduction in the size of the workforce

An improvement in the quality of recruitsAn improvement in the quality of recruits

Investment in trainingInvestment in training

A deterioration in the quality of capital equipment A deterioration in the quality of capital equipment

With lower quality capital equipment, labour will be less productive. A causes a reduction in production but not in output per head. B and D will lead to a rise in productivity.

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Investment in new technologically-advanced capital equipment will result in…

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increased output increased output

a rise in the productivity of labour a rise in the productivity of labour

all the above all the above

a rise in the productivity of capital a rise in the productivity of capital

Investment in capital equipment will raise output and will raise the productivity of the workforce. The greater the capital per worker, the greater the output per head. The fact that this investment improves the quality of capital leads to a rise in the productivity of capital.

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Productive efficiency is defined as…

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producing the best quality products producing the best quality products

the lowest cost per unit of output the lowest cost per unit of output

maximum output per square foot maximum output per square foot

the lowest average cost per person employed the lowest average cost per person employed

Efficiency is a measure of output in relation to input. A is incorrect, whereas C and D only deal with partial efficiency. B, on the other hand, deals with total efficiency. If output is produced at the lowest cost per unit then production has reached the point of maximum efficiency.

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A productively efficient economy is one which…

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spends heavily on capital goods, in order to ensure that standards of living rise in the future

spends heavily on capital goods, in order to ensure that standards of living rise in the future

benefits from full employment benefits from full employment

can only increase output in one product at the expense of output in another

can only increase output in one product at the expense of output in another

can ensure that consumers’ welfare is maximised can ensure that consumers’ welfare is maximised

If the economy is productively efficient it is producing on the PPF curve and this means that the output of one good cannot be increased without a reduction in the production of other goods.

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In a fully employed and productively efficient economy an increase in the productivity of factors of production will result in…

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a movement along the production possibility frontier a movement along the production possibility frontier

a movement from a point inside the production possibility frontier to a point on the frontier

a movement from a point inside the production possibility frontier to a point on the frontier

a rightward shift of the production possibility frontier a rightward shift of the production possibility frontier

a leftward shift of the production possibility frontier a leftward shift of the production possibility frontier

From the description of the economy it is clear that it is operating on the PPF. A rise in productivity suggests that more can be produced with available resources and this means that the PPF shifts outwards and to the right.

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On the production possibility diagram below there are four points identified. Which of the following statements is not valid?

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A movement to D can be achieved with additional resources

A movement to D can be achieved with additional resources

A movement to D can be achieved with improved technology

A movement to D can be achieved with improved technology

At point C resources are fully employedAt point C resources are fully employed

A and B are points of equal productive efficiency

A and B are points of equal productive efficiency

If resources were fully employed then the combination of output would be significantly greater than shown at C. Productive efficiency with full employment of resources could take the economy to either of the two points on the production possibility frontier ie A or B.

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0

C

B

DA

Consumer goods

Capital goods

For an individual firm the productively efficient level of output occurs when…

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total costs are at their lowest total costs are at their lowest

average costs are at their lowest average costs are at their lowest

output is maximised output is maximised

profits are maximised profits are maximised

Productive efficiency for a firm means making best use of its resources thereby producing at the lowest unit cost. This is not necessarily the point where profits are maximised.

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Economies of scale refer to lower average costs arising from, for example…

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increasing output increasing output

employing more specialised factors employing more specialised factors

producing in a larger factory producing in a larger factory

buying resources from a cheaper supplier buying resources from a cheaper supplier

Economies of scale refer to the advantages of increasing the scale of production, eg by moving to larger premises. Increased output could be achieved by increasing the use of existing plant and for this reason D rather than A is correct. B and C are incorrect because they do not relate to an increase in the scale of production.

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Larger businesses benefit from financial economies of scale, for example by…

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producing more efficiently producing more efficiently

paying lower interest rates on loans paying lower interest rates on loans

buying cheaper materials or components buying cheaper materials or components

employing low-wage staff employing low-wage staff

One of the benefits of being a large organisation is that increased scale provides access to more and cheaper forms of finance. This is a category of internal economy of scale known as a financial economy.

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Some shipping businesses can benefit from economies of increased dimensions because…

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they can buy fuel in bulk and, therefore, at a lower cost they can buy fuel in bulk and, therefore, at a lower cost

they use more technically advanced ships they use more technically advanced ships

bigger ships can carry a more than proportionate amount of cargo bigger ships can carry a more than proportionate amount of cargo

they can employ more specialised staff they can employ more specialised staff

The first three responses are all economies of scale but are not technical economies of increased dimension. Only the final response can be classified as an economy resulting from increased dimension. In essence, it means that a doubling of the size of a ship results in a more than doubling of capacity.

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A large firm benefits by spreading its advertising budget over a larger volume of output. This is an example of…

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an external economy of scale an external economy of scale

a managerial economy of scale a managerial economy of scale

a marketing economy of scale a marketing economy of scale

a financial economy of scale a financial economy of scale

A marketing economy (also known as a commercial economy) refers to any advantage in terms of buying and selling that a business derives from an increase in the scale of its operations.

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Workshop employees increase output by 5% per hour and are awarded a pay rise of 3% per hour. Other things remaining equal (ceteris paribus), the labour cost of producing each unit of production will…

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fall by 1.90% fall by 1.90%

rise by 1.90% rise by 1.90%

none of the above none of the above

rise by 1.85% rise by 1.85%

As output per hour rises by more than labour costs per hour, then it is clear that unit costs will fall. Hence, only A or D could be correct. A is, in fact, correct because the average labour cost falls by 1.9% (1.03 / 1.05 = 0.98095, representing a fall of 1.90%).

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Which of the following statements illustrates the concept of economies of scale? A business experiences management difficulties which…

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reduces output per hour reduces output per hour

can be overcome by moving to a larger factory can be overcome by moving to a larger factory

adjusts the output level in its factory so that efficiency is improved

adjusts the output level in its factory so that efficiency is improved

rationalises its two factories into one to save money rationalises its two factories into one to save money

Economies of scale are a long term rather than a short term concept. Only B is concerned with a rise in the scale of production.

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The benefits of external economies of scale can arise when…

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investing in training to enable employees to be more productive investing in training to enable employees to be more productive

employing specialist managers from outside to improve business efficiency

employing specialist managers from outside to improve business efficiency

buying more cheaply from overseas suppliers as a means of reducing costs

buying more cheaply from overseas suppliers as a means of reducing costs

a growing business prompts infrastructure improvements in its vicinity

a growing business prompts infrastructure improvements in its vicinity

External economies are the benefits that the individual firm gains from an increase in the size of the industry in which it operates. In this case, the infrastructure improvements benefit other (including rival) firms, in the vicinity.

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Diseconomies of scale can arise when…

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the average cost of a business increases the average cost of a business increases

total costs increase as scale of a business increases total costs increase as scale of a business increases

factor costs increase factor costs increase

efficiency suffers because of communication problems among employees

efficiency suffers because of communication problems among employees

This is the best known example of diseconomies of scale. As the scale of production rises so do the management problems associated with the business. The other three responses might relate to the consequences of diseconomies but not to the reasons why they arise.

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Which one of the following statements is incorrect?

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Increased scale of production leads to economies of scale Increased scale of production leads to economies of scale

Increased scale of production can lead to diseconomies of scaleIncreased scale of production can lead to diseconomies of scale

Diseconomies of scale result in a rise in average costs Diseconomies of scale result in a rise in average costs

Economies of scale result in a reduction in total costsEconomies of scale result in a reduction in total costs

Economies of scale do not reduce the total cost of production – instead they reduce the average cost per unit of production.

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