Production and Efficiency

  • Created by: horlockm
  • Created on: 28-04-15 18:19

What the spec says we need to know about...

  • Specialisation, division of labour and exchange
  • Production
  • Economies and diseconomies of scale

Specialisation, division of labour and exchange

Economic agents (e.g. producers, consumers, governments) will usally have different objectives.

Quite often, these objectives are to maximise a particular quantity (e.g. profit).


A firm's profit is their total revenue (money recieved by the firm, e.g. from sales) minus their total costs.

Firms are often assumed to want to maximise profits- this could be for various reasons:

  • Profit means the firm can survive- loss-making firms might eventually have to close
  • Greater profits allow firms to offer greater feards to the owner (or shareholders) and staff
  • Or profit can be reinvested in the business in the hope of making even more profits later. E.g. a firm might want to invest to expand

But firms may want to maximise other quantities instead, such as total sales or the firm's market share:

  • A large market share could lead to some monopoly power- this would mean that the firm could charge higher prices due to a lack of competition
  • Bigger firms are often considered more prestigious and stable, so they can attract the best employees

Some firms may also have ethical objectives- i.e. 'doing some good', even if it doesn't increase profits. 


Consumers are assumed to want to maximise their utility, while not spending more than their income (i.e. while living within their means).

  • Utility will involve different things for different people
  • But whatever someone spends their money on, you'd assume they're acting rationally to increase their utility in the way that makes most sense to them

Consumers can also act as workers- workers are assumed to want to maximise their income, while having as much free time as they need or want.


Governments try to balacne the resources of a country with the needs and wants of the population- i.e. economists assume that governments try to maximise the 'public interest'

This is likely to include some of the following:

  • Economic growth- usually measured by growth in a country's GDP
  • Full employment- everybody of a working age, who is capable of working, having a job
  • Equilibrium in the balance of payments- a balance between the payments into the country over a period of time and the payments out
  • Low inflation- keeping prices under control, as high inflation can cause serious problems

In practice, these are competing objectives- policies that help achieve one objective may make it more difficult to achieve another (e.g. extra government spending may help create jobs, but it could lead to higher inflation).

Specialisation leads to the division of labour. It would, in theory, be possible for almost everyone to make all the things they need and want themselves. People could grow their own food, make their own clothes, build their own computers, etc.

In practice though, this is very hard, so it rarely happens. What usually happens is that people and firms specialise- some people grow food, other people make clothes, others…


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