The Economics of production (week 3)

Question 1

What is an entity?

Answer 1

an individual worker in a firm

Question 2

What is economic specialisation?

Answer 2

a method of product, where an entity focuses on a limited scope of activities to gain a greater degree of efficiency in production

Question 3

What can specialisation in the production of goods and services lead to?

Answer 3

increases in productivity

Question 4

What is an example of specialisation?

Answer 4

Henry Ford’s use of the assembly line in his factories to increase the productivity of producing motor cars in 1920s

Question 5

What is the Assembly line?

Answer 5

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

Question 6

What are productivity increases caused by?

Answer 6

learning by doing

differences in ability

economies of scale

Question 7

How does learning by doing increase productivity?

Answer 7

workers are able to acquire skills that make them much more adept at their job, therefore productivity increases

Question 8

How does differences in ability increase productivity?

Answer 8

some people are better at some activities than others

Question 9

How do economies of scale increase productivity?

Answer 9

it is cost-effective to expand the scale of operations

Question 10

In what 2 ways do economists distinguish who is better at doing what?

Answer 10

1) Absolute advantage

2) Comparative advantage

Question 11

What is absolute advantage?

Answer 11

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

Question 12

What is comparative advantage?

Answer 12

workers differ in their ‘relative ability’ to do things as well as their absolute ability

Question 13

What generates comparative advantage?

Answer 13

the differences in relative ability

Question 14

What do economists use to determine comparative advantage?

Answer 14

the opportunity cost of an action (the benefit that is forgone by taking the action)

Question 15

What is the opportunity cost of a full time university student?

Answer 15

the foregone earnings that the student could have made if they weren’t a student and worked full time instead

Question 16

If Greta has a lower opportunity cost in the production of good X than Carlos, then what advantage does she have?

Answer 16

comparative advantage in the production of good X

Question 17

Summary points so far (the economics of production) (3)

Answer 17

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

Question 18

What do we assume when firms choose a method of production?

Answer 18

assume that the firm aims to minimise the cost of production

Question 19

What is cost minimisation?

Answer 19

a necessary but not sufficient condition for profit maximisation

Question 20

What does an isoquant show?

Answer 20

all possible combinations of inputs that can produce a given efficient level of output

where the inputs are labour and capital

Question 21

What do the different points on the isoquant represent?

Answer 21

different production techniques

Question 22

In order to choose the right technique from the different production techniques represented by the Isoquant, what do we need to know?

Answer 22

how much a given technique costs

this info is given by the Isocost line

Question 23

What does the Isocost line show?

Answer 23

the different input combinations with the same total cost

Question 24

What is the downward sloping straight line of the Isocost line?

Answer 24

the relative price of the two input factors

Question 25

What is the equation of the isocost line?

Answer 25

Total Cost = wL + rK

where w = wage rate

where r = price of renting capital

Question 26

What is the slope of the isocost line also known as?

Answer 26

-r/w

interest rate / wage rate

reflects the relative price of the two factors of production

Question 27

How would you use the isocost line to decide which specific technology to use?

Answer 27

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

Question 28

What are the consequences of change in the price of inputs? (2)

Answer 28

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