3.1.3.1 PRODUCTION AND PRODUCTIVITY

Define production

Production is the process of creating goods and services by transforming inputs (resources) into outputs that satifsy human wants

What are the 2 production theories?

Short-run production theory

Long-run production theory

What is the short run production theory? (at least one factor of production is fixed)

The law of diminishing returns

What is the law of diminishing returns?

This law explains how output changes when one variable factor is increased while other factors remain fixed

What does the law of diminishing returns lead to?

Short run cost theory (costs arise because some factors are fixed)

What is the long run production theory? (all factors of production are variable so firms can change its scale of production)

Returns to scale

What are returns to scale?

Output increases in the same proportion

What does return to scale lead to?

Long run cost theory (costs change when all factors are variable)

Define factors of production (factor inputs)

Resources used to produce goods and services

• land, labour, capital, enterprise

Define productivity

The measure of how efficiently inputs are used to produce outputs

Define productivity gap

The difference in productivity levels between:

• countries

Or

• firms, industries, or time periods

Define labour productivity

Measures the output per unit of labour input

• such as per worker or per hour worked

Define capital productivity

Measures the output produced per unit or capital

• such as machinery or equipment

Define perfect competition (market structures)

Many firms sell identical products

What are some characteristics of perfect competition?

• very large numbers of buyers and sellers

• free entry and exit of firms

• normal profits in the long run

• firms are price takers

Example of a firm/industry with perfect competition?

Agricultural - wheat/rice

Define monopolistically (market structures)

Many firms sell similar but differentiated products

What are some characteristics of monopolistically market structures?

• many buyers and sellers

• firms have some price control

• firms earn normal profits in the long run

Example of a firm/industry operating monopolistically?

Restaurants and clothing brands

Define oligopoly (market structures)

Market dominated by a few large firms where each firms actions affects others

What are some characteristics of an oligopoly market structure?

• few large sellers

• high barrier to entry

• firms are independent

Example of a firm/industry operating a oligopoly market structure?

Automobile, airline industries

Define duopoly (market structures)

Only two firms dominate the market

What are some characteristics of a duopoly market structure?

• two major sellers

• possibility of collision or price wars

• products may be similar

Example of a firm/industry that operates duopoly?

Boeing and Airbus

Define monopoly (market structure)

A single firm controls the entire market for a product with no close substitutes

What are some characteristics of a monopoly market structure?

• single sellers

• high barrier to entry

• price discrimination may occur

Example of a firm/industry that operates in a monopoly?

Public utilities - water, electricity

Define productive efficiency

Occurs when goods and services are produced at the lowest possible cost, using the least amount of resources

• no resources are wasted, output is maximized from given inputs

Where does a point go on a PPF that shows productive efficiency?

On the PPF curve

Where does a point go on the PPF if it is productively inefficient?

Inside the PPF

If a point is outside the PPF, what does this mean?

Not attainable in the short run

What does a cost curve look like?

U shaped

Where do point go on a cost curve that show

productively efficient and productively inefficient?

Efficient - the dip of the U

Inefficient- the top left of the U

If an economy is productively inefficient, what are 4 ideas that could mean it becomes productively efficient?

1. Better resource utilization (machinery/land fully used)

2. Improving skills and tech (investment for training for workers)

3. Reallocation of resources (move resources from less productive sectors to more productive sectors)

4. Reducing waste (minimize inefficiencies in production)

Pick the correct one:

A firm is said to be productively efficient when

A - it is a profit maximizer

B - price equals marginal cost

C - producers minimize the wastage or resources

D - consumer wants are satisfied

C

Productive efficiency occurs when firms produce at the lowest possible cost, using resources fully and without waste

Pick the correct one:

Productive effect can be shown if

A - price equals average cost at its minimum point

B - a firm is producing at the lowest point on its long run average cost curve

C - price exceeds average cost

D - an economy is producing on its PPF

E - a,b and d

E

a) indicates productive efficiency in the short run

b) shows long run productive efficiency

d) shows resources are fully used

Pick the correct one:

A firm is productively inefficient if

A - price equals marginal cost

B - it can provide more of one good only by producing less of another

C - it can produce more of one good without needing to produce less of another

D - a and b

C

This would mean resources are not fully used

What is labour productivity in the UK compared to other developed economies?

Tends to be below major developed economies like US, Germany, France

Productive growth has been relatively slow compared to G7 countries

How is UK productivity measured?

GDP per hour worked or output per worker

What is a timeline or world commodity prices?

1970 - oil shocks

2000s - global commodity boom

2020 - pandemic

2025 - recent trends

What causes a fall in the supply or commodities?

Less of a commodity is available at any given price

What causes a fall in commodity prices?

Natural environment conditions (poor weather conditions, diseases)

Investment/technological factors

Supply chain disruptions

Government policies (taxes/subsidies)

Production costs increase

What are some reasons why prices or second hand cars fall?

Depreciation, wear and tear, supply and demand factors, economic conditions (interest rates), policies (stricter emissions)

How does Akerlof's lemons explain the price of second hand cars?

He studied markets where sellers knew more than buyers about the quality of the product

Sellers know if their car is a “good car” or a “lemon” (bad car)

Buyers cannot tell the difference before purchase

This mean they are willing to pay less

This pushes down the prices

How many houses has the supply or housing increase by in the last year in the UK?

208,600 net additional dwellings supplied in 2024-2025 (a 6% decease from the previous year)

How many houses does the UK need to build each year?

300,000 new homes per year is the annual target

Why has the demand for housing increased?

Population, smaller household sizes, life expectancy and demographic changes, economic factors

What sort of a good is housing?

Merit good and normal good

Merit - society believes people should have access

Normal - demand increases as income increases

What sort of a good is rental accommodation?

Rivalrous and excludable

Rivalrous - it one person occupies it, another cannot

Excludable - landlords can refuse or change for use