Production & Productivity (AQA A Level Economics)

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