AQA A-Level Economics (7136) · The Operation of Markets
Specification points
- Production and productivity; specialisation and the division of labour.
- The law of diminishing returns (short run).
- Returns to scale and economies/diseconomies of scale (long run).
Production and productivity
- Production is total output; productivity is output per unit of input.
- Specialisation and the division of labour raise productivity but can be repetitive and create over-dependence.
Costs in the short run
In the short run at least one factor is fixed, so the law of diminishing returns applies: adding variable factors to a fixed factor eventually reduces the *extra* output per unit, raising marginal cost. This gives the U-shaped short-run average cost curve.
| Cost | Meaning |
|---|---|
| Fixed cost | Does not vary with output. |
| Variable cost | Varies with output. |
| Marginal cost | The cost of one more unit. |
Costs in the long run
In the long run all factors vary, giving returns to scale:
- Economies of scale — falling long-run average cost as output rises (purchasing, technical, financial, managerial, risk-bearing).
- Diseconomies of scale — rising LRAC when a firm grows too large (communication and coordination problems).
Diminishing returns is a short-run idea (one fixed factor); economies of scale is a long-run idea (all factors vary).
Key definitions
| Term | Definition |
|---|---|
| Law of diminishing returns | Adding a variable factor to a fixed factor eventually reduces marginal output. |
| Economies of scale | Falling long-run average cost as output rises. |
| Minimum efficient scale | The lowest output at which LRAC is minimised. |
Worked example
A factory adds more workers to fixed machinery. Output rises at first, but beyond a point each extra worker adds less (diminishing returns), raising marginal cost. If instead the firm builds a larger plant (long run), it may reach economies of scale and lower its average cost — until it grows so large that diseconomies set in.
Common exam mistakes
- Confusing diminishing returns (short run) with diseconomies of scale (long run).
- Mixing up marginal and average cost.
Exam technique
Be clear about the time period, draw the correct cost curves, and link economies of scale to firm growth and market structure.
Quick revision
- Productivity = output per input; specialisation raises it.
- Short run: diminishing returns (fixed factor). Long run: economies/diseconomies of scale.