OxfordAQA International AS and A-level Economics: Production and specialisation (9640) – Revision Notes

Condensed notes based on the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, sections 3.1.3.1 (production and productivity) and 3.1.3.2 (specialisation, division of labour and exchange). This is International AS content (Unit 1). Read the study guide first for the reasoning behind each point. Practise with the practice set, tick off content on the checklist, and use the OxfordAQA Economics hub. A quick check of your level: the free diagnostic tests. All figures are invented.

Key definitions

Term	Meaning
Production	Converting inputs (raw materials, capital, labour) into final output
Natural environment	Source of inputs (water, soil, timber, minerals, energy); can be damaged by production
Productivity	Output obtained for each unit of input used
Labour productivity	Output obtained for each worker, or each worker-hour
Specialisation	Focusing on a narrow set of tasks or products
Division of labour	Splitting production into stages, each done by a different worker
Barter	Direct swapping of goods without money
Double coincidence of wants	Both parties must want what the other offers
Medium of exchange	Money: what sellers will accept in return for their goods and services

Formulas and rules

Quantity	Rule
Labour productivity	Total output divided by workers, or by total hours
Total hours	Workers × hours each
Percentage change	(new − old) ÷ old × 100
Index number	Value ÷ base-year value × 100
Real value	Nominal value ÷ price index × 100
Productivity growth	Approximately output growth minus growth in hours
Net change in a renewable stock	Regrowth (or recharge) minus amount taken
Barter exchange ratios for n goods	n(n − 1) ÷ 2
Mean	Sum ÷ number of values
Median	Middle value when ranked

Production and the environment

• Inputs come from the environment, so economic activity depends on it.
• Production can pollute and deplete. Output that damages future inputs may not be sustainable.
• Evaluation points: substitutes for the depleted input, how fast the stock renews, how far costs fall on people who do not benefit from the output.

Quick reminder. A timber stock is 300 (thousand cubic metres, illustrative). Harvest is 36 a year; regrowth is 30 a year. Net change = 30 − 36 = −6 a year. Years to empty = 300 ÷ 6 = 50. Cutting the harvest to 30 would hold the stock steady.

Method: calculating and interpreting productivity

1. Find total hours if hours are given per worker: workers × hours.
2. Divide output by workers or hours. State the unit.
3. For a change, use (new − old) ÷ old × 100.
4. Say whether production, productivity, or both changed. Compare output growth with input growth.
5. Link a cause to the change: capital, skills, technology, organisation.

Worked reminder. A workshop has 9 workers, 40 hours each, and makes 7,200 items. Hours = 360. Output per worker = 800. Output per hour = 20. If a retraining programme lifts output per hour to 23, the rise is (23 − 20) ÷ 20 × 100 = 15%.

Production and productivity can diverge. More output with proportionally more workers means no rise in productivity. More output with the same workers means a rise.

Method: index numbers and real values

• Productivity of 25, 26 and 27.5 over three years gives an index (year 1 = 100) of 100, 104 and 110.
• To compare years, deflate nominal values by the price index. Nominal 330 with a price index of 110 gives real 330 ÷ 110 × 100 = 300.
• Use the median when one extreme value distorts the mean. For 6, 9, 10, 14 and 31, the mean is 14 and the median is 10.

Method: productivity for a whole economy

Worked reminder (Country S, illustrative). Output rises from 3,000 to 3,150 (+5%) while hours worked rise from 100 to 102 (+2%). Output per hour moves from 3,000 ÷ 100 = 30 to 3,150 ÷ 102 = 30.88, a rise of 2.9%. Roughly two-fifths of the output growth came from more hours and three-fifths from higher productivity. Higher living standards in the long run depend mainly on productivity, because hours cannot keep growing for ever.

Causes of rising labour productivity to quote: more capital per worker, better technology, training and education, better health, better organisation (including division of labour). Always link the cause to the context in the question.

Chains of reasoning to practise

Division of labour raises output. Tasks are split, so each worker repeats one task, so skill rises and switching time falls, so output per worker-hour rises, so unit costs can fall if wages do not rise as fast. Judgement: this depends on there being enough demand to absorb the extra units.

Specialisation creates a need for exchange. Workers produce a narrow range of goods, so they must obtain the rest from others, so a method of exchange is needed. Barter is slow because of the double coincidence of wants, so money as a medium of exchange saves time and lets specialisation spread.

Production damages the environment. Extraction or pollution reduces the stock or quality of inputs, so future output may fall or become costlier. Judgement: depends on renewal rates, substitutes and the scale of the activity.

Output up, productivity flat. The firm hires proportionally more workers, so output per worker is unchanged. Extra inputs, not better use of inputs, explain the growth.

Specialisation and division of labour

Benefits

• Practice makes tasks quicker and more accurate.
• Less time lost switching tasks.
• Machines and tools in constant use.
• More output from each worker, which may lower unit costs and give consumers more choice.

Costs

• Repetitive work lowers motivation and can raise absence and turnover.
• Interdependence: one weak stage limits the whole process.
• Narrow skills make it harder to change jobs, so there is a risk of unemployment for specialists.
• Greater need for coordination and for exchange with others.

Bottleneck reminder. A three-stage line can complete 12, 9 and 15 items an hour at its stages. Output is limited to 9 an hour. Adding a second worker at stage two (now 18 an hour) lifts the line to 12 an hour, limited by stage one. The gain is (12 − 9) ÷ 9 × 100 = 33.3%. Adding labour helps only at the stage that limits output.

Evaluation checklist: size of the market; type of work; whether management uses rotation or training; short-run versus long-run effects on workers; who gains (consumers, firm, workers).

Exchange and money

• Specialisation leaves people relying on exchange for most of their consumption.
• Barter requires a double coincidence of wants, and it needs many exchange ratios: 20 goods would need 20 × 19 ÷ 2 = 190.
• Money as a medium of exchange removes the need for a matching partner and gives one price per good.
• Result: less time searching, more time producing, so specialisation is easier.
• Limit: money works only while people trust it.

Must-know distinctions

• Production versus productivity: total output against output per input used.
• Output per worker versus per hour: use per hour if hours changed.
• Specialisation versus division of labour: the first can apply to a country or firm; the second is within production.
• Nominal versus real: only real values compare output over time.
• Barter versus money: both are exchange, but barter is far less efficient.

Quick self-test

1. Define production.
2. Define labour productivity.
3. A workshop has 9 workers, each working 40 hours, and makes 7,200 items. Calculate output per worker and per hour.
4. Output rises 10% and hours rise 4%. Calculate productivity growth to 1 decimal place.
5. Productivity rises from 25 to 27.5 units per hour. What is the index if the base is 25?
6. Nominal output is 330 and the price index is 110. Find real output.
7. Find the mean and median of 6, 9, 10, 14 and 31.
8. How many barter exchange ratios exist for 20 goods?
9. State two costs of division of labour.
10. State two ways the environment links to production.
11. Why does specialisation need a means of exchange?

Answers

1. Converting inputs such as raw materials, capital and labour into final output.
2. Output per worker or per worker-hour.
3. 7,200 ÷ 9 = 800 per worker; 7,200 ÷ 360 = 20 per hour.
4. 1.10 ÷ 1.04 = 1.0577, so growth is 5.8%.
5. 27.5 ÷ 25 × 100 = 110.
6. 330 ÷ 110 × 100 = 300.
7. Mean 14; median 10.
8. 20 × 19 ÷ 2 = 190.
9. Any two: monotony, interdependence, narrow skills, coordination costs.
10. It supplies inputs; production can damage it (pollution, depletion).
11. Producers make a surplus of one good and need others; exchange lets them obtain what they do not make.

Where marks are usually lost

• Defining productivity as output rather than output per input.
• Saying productivity rose when only output rose.
• Ignoring hours when working time has changed.
• Mixing up the base year in an index.
• Using nominal figures to judge real change.
• Listing benefits of division of labour with no costs, or no judgement.
• Calling barter impossible instead of inefficient.
• Giving the formula without units or a conclusion.

Official syllabus

OxfordAQA, International AS and A-level Economics (9640) specification, version 1.2, sections 3.1.3.1 and 3.1.3.2, with section 3.5 (quantitative skills). First teaching September 2020.