Question

1) Give 3 reasons that explain why the division of labor increases an economy's level of production.

2) Explain why scarcity leads to trade offs.

Answer 1

1. Following are the reasons that explain the role of division of labor in increasing the economy's level of production:

• Specialization : specialization means producing the goods that one is best at. It allows the workers to produce goods in which the economy has an advantage. This increases the amount of goods produced in given time interval.
• Efficiency : when a worker focuses at one job, his efficiency inceeases and he learns to produce the good faster and of better quality thereby boosting production.
• Economies of scale : economies of scale means reduced cost per unit due to increased production of a particular good. division of labor will allow the producers to focus on producing one good more and enjoy economies of scale.

2. When it comes to consumption of two goods, the consumers face trade offs due to increasing opportunity costs and limited resources. Opportunity cost is the value of the best alternative forgone. Given that the resources are scarce, When a consumer wants to consume more of a good, he has to give up another good and his willingness to give up the other good will keep falling (given the scarce resources) and he will face trade off between the two goods.