AQA GCSE Economics: Productivity and economies of scale (8136) – Revision Notes

These notes condense sections 3.1.4.2 (production and productivity) and 3.1.4.3 (economies of scale) of the AQA GCSE Economics (8136) specification, first taught from September 2017. The specification gives no tier labels. For full explanations start with the study guide, then test yourself with the practice questions. Also useful: the AQA GCSE Economics hub, the checklist and the free diagnostics. All firms and figures are invented.

Key definitions

Term	Meaning
Production	Total output of goods or services in a period
Productivity	Amount made per worker or per hour worked
Average cost	Total cost divided by output (cost per unit)
Economies of scale	Average cost falls as the scale of production rises
Diseconomies of scale	Average cost rises when a firm grows too large
Division of labour	Workers each specialise in one task

Formulas

Quantity	Calculation
Labour productivity	Output / workers (or hours)
Labour cost per unit	Wage cost / output per worker
Average cost	Total cost / output
Percentage change	(new − old) / old × 100
Profit	Total revenue − total cost

Production versus productivity

Production is a total. Productivity is a ratio. Production can rise while productivity falls or stays the same.

Reminder (invented). A call centre has 5 staff handling 600 calls a day. It hires 2 more and now handles 840 calls.

• Before: 600 / 5 = 120 calls per worker.
• After: 840 / 7 = 120 calls per worker.
• Production rose by 240 calls (40%). Productivity did not change.

Factors affecting productivity

• Skills and training.
• Capital and technology.
• Motivation, pay and working conditions.
• Management and organisation, including division of labour.
• Workers’ health and education.

Method in steps for a “why does productivity rise” answer

1. Name the factor.
2. Say what changes (workers know more, or have better tools).
3. Link to output per worker rising.
4. Link to lower cost per unit.

Benefits of higher productivity

Who	Benefit
Firm	Lower unit costs, higher profit, price competitiveness
Workers	Higher pay is affordable
Consumers	Lower prices or better quality
Economy	More output from the same resources, so growth

Reminder (invented). A workshop pays £520 a week per worker. Output per worker rises from 20 to 26 units.

• Productivity rise: (26 − 20) / 20 = 30%.
• Labour cost per unit: £520 / 20 = £26.00 before, £520 / 26 = £20.00 after.
• Saving: £6.00 a unit.

Limits. Investment and training cost money, automation can remove jobs, and gains may not be passed on.

Economies of scale

Average cost falls as output rises in the long run. Total cost still rises.

Reminder (invented). A small printer has these costs.

Output	Total cost (£)	Average cost (£)
500	4,000	8.00
1,000	6,500	6.50
2,000	11,000	5.50
3,000	18,000	6.00
4,000	28,000	7.00

• Between 500 and 2,000 units, average cost falls from £8.00 to £5.50, which is −31.25%, or about 31.3%.
• Economies of scale end at 2,000 units, the lowest average cost.
• From 2,000 to 3,000 units, average cost rises by (6.00 − 5.50) / 5.50 = 9.1%. These are diseconomies.

Five types: a memory table

Type	Trigger word	One-line link to lower unit cost
Purchasing	Bulk	Big orders earn discounts
Technical	Machines	Big machines spread fixed costs over more units
Financial	Borrowing	Large firms pay lower interest rates
Managerial	Specialists	Specialist managers’ pay is shared across more output
Risk-bearing	Spread	Many products or markets reduce the damage from one failure

Diseconomies of scale

Causes: communication, coordination and motivation problems. Effect: average cost rises. Remember the chain: too big, so slow decisions, so errors and delays, so higher average cost.

Worked reminders for the types

All figures are invented.

• Purchasing. A decorator buys 500 tins of paint at £6.00 each. A national chain buys 5,000 tins at £5.10 each. Saving per tin: £0.90, which is 0.90 / 6.00 = 15%.
• Technical. A packing line costs £72,000 a year and can pack up to 36,000 boxes. At 12,000 boxes the line adds £6.00 a box. At 36,000 boxes it adds £2.00 a box. The same machine, spread over more output, cuts the average cost.
• Financial. A firm borrows £150,000. At an 8% rate, interest is £12,000 a year. A larger rival pays 5%, which is £7,500 a year. The rival pays 37.5% less interest on the same loan.
• Managerial. A human resources manager paid £48,000 serves 40 staff in a small firm (£1,200 a head) or 160 staff in a larger one (£300 a head).
• Risk-bearing. A grower sells one crop in one town. If the harvest fails or the town stops buying, all income goes. A grower with five crops sold in several towns loses only a part.

Evaluation chains to learn

Use these as patterns. Each moves from cause to effect to a judgement.

• Training raises output per worker, so labour cost per unit falls. But training costs money and workers may leave afterwards, so the gain depends on the firm keeping its staff.
• A new machine raises productivity, so profit rises. But if the machine replaces workers, there are redundancy costs and lower morale, so the gain may be smaller than expected.
• Growth lowers average cost, so the firm can cut prices. But if growth goes beyond the lowest point of average cost, diseconomies set in and profit falls.
• A large firm’s lower costs create a barrier to entry. But if the firm becomes slow and impersonal, small firms can win customers with better service.

A good conclusion says which factor matters most in the case given and why. For growth, it says when the benefits are likely to outweigh the costs, for example when demand is strong and average cost is still falling.

How to set out a calculation

1. Write the formula.
2. Substitute the numbers, with units.
3. Give the answer with its unit (loaves per worker, £ per unit, per cent).
4. For a percentage change, divide the change by the original value.

Behaviour and growth

• Lower average cost allows lower prices, or higher profit at the same price.
• It creates a barrier to entry for small rivals.
• Small firms may specialise in a niche.

Reminder (invented). The printer sells every unit at £7.50. At 2,000 units, revenue is £15,000 and profit is £15,000 − £11,000 = £4,000, or £2.00 a unit. At 4,000 units, revenue is £30,000 and profit is £30,000 − £28,000 = £2,000, or £0.50 a unit. Growing past the lowest average cost halves the profit, even though output has doubled.

Benefits of growth	Costs of growth
Lower average costs	Finance needed to expand
Higher profit	Risk of diseconomies
Larger market share	Loss of control or personal touch
Bargaining power	More managers needed
Risk spread	Demand may not match extra output

Must-know distinctions

• Production is a total, productivity a ratio.
• Total cost rises with scale, average cost may fall.
• Economies of scale are long-run changes in scale, not extra workers in the same plant.
• Higher output with lower profit per unit can still mean higher total profit. Check both.

Quick self-test

1. Define productivity.
2. A farm harvests 2,400 kg with 8 workers. Calculate output per worker.
3. A call centre adds staff and handles more calls, but calls per worker are unchanged. Has production or productivity changed?
4. State two factors that raise productivity.
5. A printer’s total cost is £28,000 for 4,000 units. Calculate average cost.
6. Which type of economy of scale is a large firm borrowing at a lower interest rate?
7. Give one cause of diseconomies of scale.
8. Using the printer table, calculate the percentage fall in average cost from 500 to 2,000 units.
9. True or false: economies of scale mean total cost falls as output rises.
10. Give one cost of growth for a business.

Answers

1. The amount made per worker or per hour worked.
2. 2,400 / 8 = 300 kg per worker.
3. Production rose. Productivity did not change.
4. Any two of: training, better machines, motivation, better organisation, health.
5. 28,000 / 4,000 = £7.00.
6. Financial.
7. Communication problems, coordination problems or weak motivation.
8. (5.50 − 8.00) / 8.00 = −31.25%, about 31.3% lower.
9. False. Average cost falls. Total cost rises.
10. Any one of: finance needed, risk of diseconomies, loss of control, extra managers’ pay.

Where marks are usually lost

• Using production and productivity as the same word.
• Quoting a rise in output as a rise in productivity.
• Saying costs fall, without saying average cost or cost per unit.
• Naming a type of economy of scale but not saying why unit cost falls.
• Calculating a percentage change against the new value, not the old.
• Giving diseconomies of scale as simply “higher costs” with no cause.
• Evaluating growth without a judgement about when it pays.

Official syllabus

AQA, GCSE Economics (8136) specification, for first teaching from September 2017, sections 3.1.4.2 and 3.1.4.3.