Cambridge IGCSE Economics 0455
Syllabus points
- Distinguish between production and productivity.
- Explain the demand for factors of production.
- Explain how firms choose between labour-intensive and capital-intensive methods.
- Explain economies and diseconomies of scale.
Production and productivity
- Production is the total output of goods and services.
- Productivity is output per factor (e.g. output per worker per hour). Higher productivity means more output from the same resources.
Production = total output. Productivity = output per unit of input.
Key definitions
| Term | Definition |
|---|---|
| Productivity | Output per unit of a factor of production. |
| Labour-intensive | Production using a high proportion of labour relative to capital. |
| Capital-intensive | Production using a high proportion of capital relative to labour. |
| Economies of scale | Falling average costs as output grows. |
Labour- versus capital-intensive production
Firms choose their method based on the relative cost and productivity of labour and capital:
- Labour-intensive — used where labour is cheap or the work needs a personal touch (e.g. hand-made goods).
- Capital-intensive — used where machines are cheaper and more productive (e.g. car assembly).
Economies and diseconomies of scale
As a firm grows, average cost (cost per unit) usually falls at first — these are economies of scale:
- Purchasing — bulk-buying discounts.
- Financial — cheaper borrowing for large firms.
- Technical — using large, efficient machinery.
If a firm grows too large, average costs can rise — diseconomies of scale — often due to poor communication and coordination.
Worked example
A bakery buys a large automated oven (capital-intensive). Output per worker rises (higher productivity) and, by producing in bulk, it gets cheaper flour (purchasing economy of scale), so average cost per loaf falls. If it expands into a huge factory with many managers, communication may worsen and average costs could rise — a diseconomy of scale.
Common exam mistakes
- Confusing production (total) with productivity (per unit).
- Saying bigger is always cheaper — very large firms can face diseconomies of scale.
Exam technique
Define productivity precisely, and use economies of scale to explain why large firms often have lower average costs (linking to firm growth and market structure).
Quick revision
- Production = total output; productivity = output per input.
- Economies of scale → lower average cost; diseconomies → higher average cost.