Production & Productivity (Cambridge (CIE) IGCSE Economics)

Revision Note

The Distinction Between Production and Productivity

  • The terms production and productivity are fundamentally different

  • Production is the act of adding value to the factors of production to create goods/services e.g. using tomatoes and basil to create a soup

    • It is the process of factor conversion into goods/services

    • It is a measure of output e.g. 3 cans of soup

  • 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 and provides a metric for comparison e.g. after training workers proved to be 27% more efficient in their productivity

    • It is a measure of efficiency e.g. 3 cans produced per worker 

Influences on Production

  • 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

Influences on Productivity

  • Higher productivity is important for a firm and economy for the following reasons

  1. It lowers costs and improves a firms national and international ability to compete

  2. It allows firms to produce more output with the same input which puts it in a position to generate increased economies of scale

  3. Firms can generate higher profits

  4. Higher profits may mean that the firms can pay their workers more

  5. Higher profits may mean that the government revenue from corporation tax will increase

  6. An improved ability to compete in international markets will help to generate economic growth

  

The Influences on Productivity Growth

Influence

Explanation

Innovation

  • Process innovation occurs when systems or manufacturing processes are improved resulting in increased efficiency e.g. Ford created the first moving production line for motor vehicle manufacturing

  • Product innovation occurs when a new product emerges that does things better/faster e.g. driver free cars may transform the taxi industry and lower taxi fares

Investment

  • When the expenditure on capital (machinery, building etc.) increases, workers are usually able to perform their jobs more efficiently resulting in higher output

  • If firms hold back investment for long periods of time, their capital (machinery) degrades possibly making it harder for workers to do their jobs

  • The interest rates in an economy are one of the main determinants of investment by firms. Low rates encourage investment and vice versa

Training

  • Any form of training (on the job, degree, diploma etc) improves the skill level of labour usually resulting in an ability to do the job better/quicker

Competition

  • Competition between rival firms ensures that productivity improvements continue to occur as the firms are seeking to 'win' market share from each other

  • Some industries which are dominated by a monopoly lack competition and it is possible for those firms to become inefficient and to have low levels of productivity

Entrepreneurial freedom

  • Economies which encourage small business and make it easy for firms to start up and compete, ensure that there is a healthy level of competition leading to productivity improvements

Examiner Tip

Students regularly confuse the terms 'production' and 'productivity'. make sure you know the difference.

Remember that production (output) can rise while productivity (efficiency) falls.

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