Production & Productivity (AQA A Level Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
The Purpose of Business Activity
The purpose of business activity is to produce goods or services that meet customer needs
This is accomplished through the process of production
The factors of production are combined in such a way so as to minimise the costs and maximise the sales revenue
Adding value is the process of taking inputs and combining them in such a way that customers find them useful and are willing to pay more for the end product than the value of the raw materials used to manufacture it
Diagram: The Production Process
The purpose of business activity is to take inputs, add value to them, and create products which meet customer needs
Diagram analysis
Raw materials and the other factors of production are used to produce goods and services
Different types of costs are incurred in production, and when the firm sells its products, they receive sales revenue
If the total costs incurred in the process are less than the sales revenue, the firm will make a profit
If the total costs incurred in the process are greater than the sales revenue, the firm will make a loss
Production
Production is the act of adding value to the factors of production (such as capital, and labour) to create the goods/services e.g. using tomatoes & basil to create a soup
It is the process of factor conversion of inputs into final product (goods/services)
It is a measure of output e.g. 3 cans of soup
Production is often influenced by the state of the economy
During a recession, production falls
During a boom period, production increases
As production is dependent on the demand for goods/services, any change to any of the conditions of demand will result in changes to production
As production is also dependent on the supply of the factors of production, any change to any of the conditions of supply will result in changes to production
Productivity
Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of input
It calculates how efficiently resources are being used in the creation of goods/services & provides a metric for comparison
E.g Capital productivity is output per unit if capital
Labour productivity is significant as it is output per worker
It is a measure of efficiency e.g. 3 cans produced per worker
E.g After training workers proved to be 27% more efficient in their labour productivity
Higher productivity is important for a firm & economy for the following reasons
It lowers costs & improves a firms national & international ability to compete
It allows firms to produce more output with the same input which puts it in a position to generate increased economies of scale
Firms can generate higher profits
Higher profits may mean that the firms can pay their workers more
Higher profits may mean that the government revenue from corporation tax will increase
An improved ability to compete in international markets will help to generate economic growth
Worked Example
The table shows the number of pairs of luxury wool socks produced by Scotty Socks Ltd. in 2021 and 2022.
Year | Units Produced |
---|---|
2021 | 46,000 |
2022 | 69,000 |
In 2021, Scotty Socks employed 50 staff. In 2022, the number of staff employed by the business increased by 20%.
Calculate the percentage change in labour productivity between 2021 and 2022. (4)
Step 1: Calculate the labour productivity for 2021
(1 mark)
Step 2: Calculate the labour productivity for 2022
(1 mark)
Step 3: Calculate the percentage difference between the two years ((new-old) / old)
(1 mark)
Step 4: Identify whether the percentage difference is an increase or decrease
Labour productivity has increased from 920 to 1,150 units so it is a 25% percentage increase (1 mark)
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