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

This guide follows the AQA GCSE Economics (8136) specification, first taught from September 2017. It covers sections 3.1.4.2 (production and productivity) and 3.1.4.3 (economies of scale). The specification gives no tier labels, so everything here is common content. Every firm, country and figure below is invented for teaching. For quick recall, use the revision notes. To test yourself, try the practice questions. The wider How Markets Work guide, the AQA GCSE Economics hub, the checklist and the free diagnostics sit alongside it.

What this unit covers

Reference	You must be able to	Where
3.1.4.2	Explain the difference between production and productivity	Section 1
3.1.4.2	Explain the factors that influence productivity	Section 2
3.1.4.2	Explain the benefits of increased productivity	Section 3
3.1.4.3	Explain economies of scale as the effect on average costs of a rise in production	Section 4
3.1.4.3	Describe managerial, purchasing, financial, technical and risk-bearing economies	Section 5
3.1.4.3	Explain what diseconomies of scale are	Section 6
3.1.4.3	Explain the implications for business behaviour, and the costs and benefits of growth	Sections 7 and 8

1. Production and productivity

Production is the total amount a firm, industry or country makes in a given period. It is a total.

Productivity measures how much is made for each worker or each hour worked, so it is a ratio showing how well inputs are used.

Labour productivity = total output / number of workers (or hours worked)

The two can move in different directions. Worked example 1 (invented). A small bakery makes 800 loaves a week with 4 workers, each working 40 hours. In a later week it makes 1,080 loaves with 6 workers.

• Production rose from 800 to 1,080 loaves a week (up 280).
• Productivity in the first week: 800 / 4 = 200 loaves per worker, or 800 / 160 hours = 5.0 loaves an hour.
• Productivity in the later week: 1,080 / 6 = 180 loaves per worker, or 1,080 / 240 hours = 4.5 loaves an hour.

Production rose but productivity fell. The bakery made more only by adding workers, and each extra worker added less than the average. A rise in production alone does not show that a firm has become more efficient.

2. Factors that influence productivity

Each factor works by changing how much one worker (or hour) can produce.

• Skills and training. Trained workers make fewer mistakes and work faster. The firm pays for training now and gains later.
• Capital and technology. Better machines, tools and software let each worker do more. A worker with a mixer produces more dough than one kneading by hand.
• Motivation. Fair pay, bonuses, good conditions and recognition raise effort. Poor morale causes absence and slow work.
• Management and organisation. Clear layouts, good planning and division of labour (each worker specialises in one task) reduce wasted time.
• Health and education. Healthy, well-educated workers can work longer and learn faster. This is a reason governments fund schools and health care.

Chain of reasoning: training, so fewer errors and faster work, so more output per worker, so lower labour cost for each unit, so higher profit or room to cut the price.

Be careful with wording. Hiring extra workers raises production, not productivity. Machines raise productivity only if workers can use them properly.

3. Benefits of increased productivity

Worked example 2 (invented). The bakery buys a larger oven. Output per worker rises from 200 to 250 loaves a week. Each worker is paid £400 a week.

• Rise in productivity: (250 − 200) / 200 × 100 = 25%.
• Labour cost per loaf before: £400 / 200 = £2.00.
• Labour cost per loaf after: £400 / 250 = £1.60.
• Fall in labour cost per loaf: (1.60 − 2.00) / 2.00 = −20%.

Who gains?

• Producers: lower unit costs, so higher profit at the same price. The firm can also cut prices and stay competitive against rivals.
• Workers: the firm can afford higher wages, because each worker now produces more.
• Consumers: lower prices, or better quality if resources are freed for other things.
• The economy: more output from the same resources, which supports economic growth and higher living standards.

Evaluation. The gains are not automatic. Machines and training cost money. Automation may reduce the number of jobs. A firm may keep the extra profit rather than pass it on. Pushing staff harder can raise short-run output but lower quality or morale.

4. Economies of scale: the idea

Economies of scale are the fall in average cost (cost per unit) that comes when a firm increases its scale of production. Average cost = total cost / output.

This is about the long run, when the firm can change all its inputs (a bigger factory, more machines), not only extra workers in the same building. Note the wording: it is average cost that falls. Total cost still rises as output rises.

Worked example 3 (invented). A furniture maker moves through six scales of production.

Scale	Output	Total cost (£)	Average cost (£)
1	1,000	12,000	12.00
2	2,000	20,000	10.00
3	4,000	34,000	8.50
4	8,000	64,000	8.00
5	12,000	108,000	9.00
6	16,000	160,000	10.00

From scale 1 to scale 4, average cost falls from £12.00 to £8.00, a change of (8 − 12) / 12 = −33.3%. These are economies of scale. From scale 4 to scale 6 it rises from £8.00 to £10.00, up 25%. These are diseconomies of scale. Output of 8,000 gives the lowest average cost.

A sketch of average cost against output looks like a shallow bowl:

AC
 |\
 | \
 |  \_____
 |        \___/   <- lowest AC at the bottom
 |_____________ Output
  economies | diseconomies

5. Types of economy of scale

Type	How it lowers average cost	Illustration (invented)
Purchasing	Large orders get bulk discounts	A café chain buys coffee beans at £7.50 a kilo in an order of 2,000 kilos. A single café pays £9.00 a kilo for 200 kilos. The chain pays 16.7% less per kilo.
Technical	Large machines and mass production spread fixed costs	A machine costing £60,000 a year makes up to 30,000 units. At 6,000 units, it adds £10.00 a unit. At 30,000 units, £2.00.
Financial	Large firms are seen as safer and borrow more cheaply	£200,000 borrowed at 9% costs £18,000 a year in interest. At 6% it costs £12,000, a third less.
Managerial	Large firms can afford specialist managers whose cost is shared	A finance manager paid £54,000 serves 15 staff (£3,600 a head) or 90 staff (£600 a head).
Risk-bearing	Selling many products in many markets spreads risk	A firm with one customer loses all sales if that customer leaves. With four equal markets, losing one costs 25%.

Each type is a reason unit costs fall as output rises. In an answer, name the type, say what the firm does, and link it to lower average cost.

6. Diseconomies of scale

Diseconomies of scale are a rise in average cost when a firm grows beyond its most efficient size. Typical causes:

• Communication problems. More layers of management slow decisions and cause misunderstandings.
• Coordination problems. It is harder to manage many sites, teams and products.
• Weaker motivation. Workers in a huge firm may feel anonymous and work less hard, which lowers productivity.

Chain: the firm grows too large, communication slows, mistakes and delays rise, so average cost rises.

7. Implications for business behaviour

A firm with lower average costs than its rivals can behave differently.

• It can cut prices and still make a profit, winning market share. Smaller rivals may be driven out.
• Its cost advantage is a barrier to entry, so new competitors find it hard to compete.
• It may keep growing (by expanding or by merging) until average cost stops falling.
• Small firms may respond by specialising in a niche where personal service matters more than low prices.

8. Costs and benefits of growth

Using worked example 3, suppose the furniture maker sells every unit at £11.

Output	Revenue (£)	Total cost (£)	Profit (£)	Profit per unit (£)
4,000	44,000	34,000	10,000	2.50
8,000	88,000	64,000	24,000	3.00
16,000	176,000	160,000	16,000	1.00

Growth to 8,000 units more than doubles profit, because average cost falls. Growth to 16,000 cuts profit, because diseconomies push average cost above its best level.

• Benefits: lower average costs, higher profit, greater market share, more bargaining power with suppliers, risk spread over more products, and a stronger chance of survival.
• Costs: money is needed to expand, there is a risk of diseconomies, control and the personal touch may be lost, and extra managers add cost.

Judgement. Growth pays only while economies of scale outweigh the costs. A firm should compare its average costs at each scale before expanding, and check that demand will buy the extra output at a worthwhile price.

Common errors

• Writing that economies of scale mean total cost falls. It is average cost that falls.
• Using production and productivity as if they mean the same thing.
• Saying “bulk buying” without linking it to lower cost per unit.
• Treating a short-run rise in output, with the same factory, as an economy of scale.
• Listing a cause of diseconomies of scale without saying that average cost rises.

See the practice questions next, then check the diagnostics.

Official syllabus

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