Topic 3 Production and efficiency

1 Welfare derived from external benefits resulting from economic activity such as the pleasure enjoyed from looking at a beautiful building; welfare derived from the company of family and friends.
(2 marks)

2 Land earns rent; labour earns wages or salaries; capital earns interest; enterprise earns profit.
(2 marks)

3 The total cost of production divided by the number of units produced. (1 mark)

4 Capital goods, for example an engineer’s drill, are intended for use in production. By contrast, consumer goods are intended for final consumption by households. Two examples are DAB radio and a bottle of wine. (4 marks)

5 Just as labour productivity is output per worker, so capital productivity is output per unit of capital.
(1 mark)

6 By measuring the number of essays written or chapters of a book read in a given time period.
(2 marks)

7 A learning effect occurs when workers become more efficient and skilled at performing particular production task(s) as they learn from previous experience of performing the task(s). In a sense it relates to the view that ‘practice makes perfect’. Likewise managers learn from previous experience.
(2 marks)

8 At a microeconomic level, productive efficiency is achieved when the average costs of production are minimised. The concept of economies of scale is based on the notion that as a firm increases its scale of production, it will benefit from greater specialisation, which will result in productivity gains and lower average costs. However, if a firm becomes too big, inefficiency and mismanagement will set in and average costs will start to rise (diseconomies of scale). (4 marks)

9 As the word indicates, specialisation means concentrating on a narrow range of tasks. Division of labour means that different workers (in this case shop workers) perform different tasks. The tasks include: answering customer queries, selling games, ordering new stock and security. These are usually four separate jobs performed by different employees. This enables them to specialise and develop the skills appropriate for the task they are performing. (4 marks)

10 Barter is the most primitive and basic method of exchange. Goods and services are exchanged directly by buyers and sellers. In this example the worker sells labour in exchange for a valued item provided by the shopkeeper. Modern economies are of course monetary economies in which money rather than barter provides the medium of exchange. (3 marks)

Answers to exam-style questions (data response)

01 A firm is productively efficient when it minimises its average production costs. The firm is operating at the lowest point on its average cost curve. (5 out of 5 marks)

Each of the two sentences on its own would earn all five of the available marks.

02 The data show changes in labour productivity rather than output per worker at the different points of time covered by the graphs. A first significant point of comparison is that changes in whole economy labour productivity and service sector labour productivity are both cyclical, with the two cycles more or less correlating with each other. There are slight lags involved, for example the change in service sector labour productivity fell to zero (compared with the previous quarter) at the beginning of the fourth quarter of 2008. By contrast, for the whole economy, zero was reached 3 months later.

A second significant point of comparison is in the range of the fluctuations. For the whole economy, the peak of labour productivity in mid-2007 was about a plus 3.5% change in labour productivity, with the trough (at the end of 2008) at a –5.25% change in labour productivity, a range of 8.75%. For the service sector, the peak of labour productivity (also in mid-2007) was about a plus 4.5% change in labour productivity, with the trough (at the beginning of the fourth quarter in 2008) at a –4.5% change in labour productivity, a range of 9%. In other words, the range was about the same.
(8 out of 8 marks)

When Extract A in a question contains two data series (in this case, changes in labour productivity for the whole economy and for the service sector within the economy), the question will ask for an identification of two significant points of comparison between information in the two series. It is important to compare across (or between) the two data series, rather than just along one of the data series.

03 The first reason for different levels of labour productivity stems from the quality of investment in a firm’s capital infrastructure. Workers are more productive if they are using the most up-to-date technology and capital equipment, such as the robots mentioned in Extract C (line 9). Labour productivity will improve because better capital equipment will allow workers to make better quality cars at a faster rate. Automoted robots can be programmed to perform complex repetitive tasks without getting tired, only needing a technician to monitor their work. This makes modern car factories more efficient and in turn this brings down costs. However, if workers are using out-dated equipment in old factories they will work more slowly and the quality of the cars produced will be inferior. More workers are employed to produce fewer cars.

A second reason is different management practices which significantly affect the productivity of workers. British industry historically has a bad reputation for poor management. This could explain why the Rover workers’ productivity was as low as 30 cars per year (Extract C, lines 2–3). The managers at Rover simply did a bad job of organising the factories and getting the best out of the workforce. In contrast, Japanese companies have an excellent reputation for innovating and motivating their workers. Toyota for example has developed the model of ‘last minute delivery’ which makes all workers feel valued. If they do not perform their tasks properly, the entire production line grinds to a halt. This also enables managers to identify problems quickly. This is reflected in Extract B which shows that Nissan car workers build on average 99 cars per worker and Toyota 88 cars per worker.
(12 out of 12 marks)

This is an excellent answer which fully obeys the instruction in the question, namely to explain two reasons. Part 03 and 07 questions only ask for explanation. They never ask for evaluation. Candidates who are otherwise good often waste time by drifting into evaluation, but this candidate does not make this mistake.

04 A main argument for government intervention in the UK car industry, in the context of saving manufacturing jobs, is to provide emergency help in an economic crisis. The 2008 economic crisis hit the UK economy particularly hard and saw consumer demand for ‘big ticket’ goods such as new cars fall dramatically. As a result, car companies in the UK responded to this sudden fall in consumer demand by significantly cutting back on production.

In this situation there is a strong case for government intervention to help distressed firms in the worst parts of a crisis. This involved schemes like the ‘car scrappage scheme’, where the British government gave consumers £2,000 towards a new car if they traded in an old car over 10 years old. In this situation it makes sense for the government to use taxpayers’ money to create market incentives to encourage spending in the economy. Demand for cars did not fall because of the poor quality of the cars but due to the wider macroeconomic crisis. It would have made little economic sense for the government to allow good companies to go bust in a crisis with the long-term consequence of skilled workers becoming unemployed.

Government intervention is justified in the short run to head off the negative effects of an economic crisis. However, government intervention is not justified in the long run to save jobs. This is because it would simply lead to taxpayers’ money being used to prop up poorly run and inefficient companies, such as Rover which ran some of the ‘worst’ plants in Britain (Extract C, line 5). The global car market is very competitive and consumers choose to buy the best cars at the best prices. Market discipline ensures that inefficient plants are ‘closed down, or reorganised to improve their efficiency’ (Extract C, line 6). This form of government intervention may ‘save’ jobs but only by imposing higher taxes in the rest of society. As the economist in Extract D (line 4) says, this would be a ‘government failure’ because taxpayers are subsiding firms to make cars that consumers do not want to buy. This is a misallocation of scarce resources and an unacceptable situation. (15 out of 25 marks)

Just like with the answer to part 04 of the Topic 2 data response question on gold mining, this answer is constrained to Level 3, earning 15 of the available 25 marks. The answer suffers from the same problems as the gold mining answer, principally lack of developed analysis that must precede in-depth evaluation. The analysis in this answer is too thin. Mention could be made of the fact that all cars that are mass-produced in the UK are the product of Japanese and US car companies. Obviously such companies would enjoy receiving subsidies from the UK government, but by contrast they might be driven off-shore by other types of government intervention, for example a requirement that cars must be manufactured solely from components produced in the UK.

Date: 2015-02-03; view: 930