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Firms and Production » Production and Productivity
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 3.5.3
- The difference between production and productivity
- How to calculate productivity
- Six influences on production and productivity
- How more investment can raise productivity
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Unlock This CourseProduction and productivity are not the same
Two words that sound alike cause lots of lost marks in exams. They mean different things.
Key terms:
- Production: the total output of goods and services produced by a firm, an industry or a country in a period of time.
- Productivity: output per worker, or per unit of any other input, in a period of time.
Production tells you how much was made. Productivity tells you how well the inputs were used. Productivity is often called labour productivity when it is measured per worker.
Calculating labour productivity
Productivity per worker = total output ÷ number of workers (for a given period, such as a week).
Worked example
Orkane Tiles is a made-up firm. In one week 20 workers make 1,000 tiles.
Production = 1,000 tiles.
Productivity = 1,000 ÷ 20 = 50 tiles per worker per week.
Next month the firm hires 5 more workers and makes 1,100 tiles a week. Production has risen to 1,100. But productivity is now 1,100 ÷ 25 = 44 tiles per worker. Production went up, yet productivity went down.
So a firm can raise production just by hiring more people. That is not the same as getting more from each worker. Firms like higher productivity because it can lower the cost of each unit they make.
Productivity can be measured for other inputs too, not only workers. A made-up farm in Tarlen uses 10 hectares of land and grows 50 tonnes of wheat in a season. Its output per hectare is 50 ÷ 10 = 5 tonnes. A machine can be measured in the same way, as output per machine per day.
Why does the difference matter? A country or firm that only makes more by using more inputs is working harder, not smarter. A firm that raises productivity gets more from the same inputs, so it can pay higher wages or sell at lower prices and still make a profit.
Influences on production and productivity
Six things matter most. Some mainly change how well each worker performs. Others help the firm to produce more in total.
💪 Motivation
Workers who feel valued, fairly paid or rewarded for effort tend to try harder. Bored or unhappy workers do the minimum.
🤖 Technology
Better machines, computers and software let each worker produce more in the same time.
💰 Investment
Spending on new capital goods gives workers more and better equipment to work with.
💼 Management
Good managers plan work well, set clear targets, organise tasks sensibly and solve problems quickly. Poor management wastes time and resources.
🏢 Working conditions
Safe, clean, comfortable workplaces with sensible hours and breaks mean fewer accidents and less sickness, so people produce more.
Remember from Division of Labour that splitting jobs into tasks can also help workers become quicker. It is one more way that productivity can rise.
Effects of investment on productivity
Remember, investment is spending on capital goods such as machines and tools. When a firm invests, workers have better equipment, so they can usually produce more in the same time. Productivity rises.
Orkane Tiles invests. The firm buys an automatic tile-cutting machine. The same 20 workers now make 1,400 tiles a week. Productivity = 1,400 ÷ 20 = 70 tiles per worker, up from 50.
What happens next:
- Production rises, because each worker makes more.
- The cost of making each tile usually falls, because the wages are spread over more tiles.
- The firm may be able to charge lower prices or earn more profit.
Investment does not always work quickly. New machines cost money, and workers may need training before they use them well. A machine that is badly used, or not looked after, will not raise productivity. Old machines that wear out and are not replaced can pull productivity down.
Production or productivity? An investment that only replaces worn-out machines may keep production the same. An investment in better machines is what raises productivity.
Common mistakes
- Saying production and productivity mean the same thing. Production is total output; productivity is output per worker or per input.
- Thinking that more output always means higher productivity. If extra workers were needed, productivity may fall.
- Writing "workers work harder" with no reason. Say why: for example training, better machines or better pay.
- Forgetting the time period. Productivity is per worker per day, week or month.
Worked example
A made-up bakery in Sundar uses 8 workers. Last week it produced 2,400 loaves. This week there were 6 workers (two were ill) and it produced 2,100 loaves.
Last week: 2,400 ÷ 8 = 300 loaves per worker.
This week: 2,100 ÷ 6 = 350 loaves per worker.
Production fell from 2,400 to 2,100, but productivity rose from 300 to 350. Falling production does not always mean falling productivity.
Quick check (multiple choice style)
A firm employs 12 workers and produces 600 units in a week. What is its labour productivity? A 12 units per worker, B 50 units per worker, C 72 units per worker, D 600 units per worker. The answer is B: 600 ÷ 12 = 50.
Exam-style question
Verlano Bottling is a made-up firm in a made-up country. It used to employ 40 workers and produced 12,000 bottles a day. The firm then bought new filling machines and sent its workers on a training course. It now employs 45 workers and produces 18,000 bottles a day.
(a) Define productivity. [2 marks]
(b) Calculate the productivity per worker before and after the changes. [2 marks]
(c) Explain two influences on the firm's productivity. [4 marks]
(d) Analyse how the new machines may affect the firm's productivity. [3 marks]
Model answer
(a) Productivity is output per worker (or per unit of input) (1) in a given period of time (1).
(b) Before: 12,000 ÷ 40 = 300 bottles per worker per day (1). After: 18,000 ÷ 45 = 400 bottles per worker per day (1).
(c) Skills and training (1): the workers have been trained, so they know the machines and make fewer mistakes, which raises output per worker (1). Technology or investment (1): the new filling machines let each worker fill more bottles in a day, so productivity rises (1).
(d) Machines are capital, so each worker has more equipment to work with (1). Each worker can fill more bottles in the same time (1). This raises output per worker, so productivity rises from 300 to 400 bottles (1).
Exam tip
In "Calculate" parts, write the sum as well as the answer, and include the unit (bottles per worker per day). In "Explain" parts, name the influence, then say how it changes output per worker.