Production
What is production?
Definition: Production involves converting factor inputs (our factors of production) into outputs (goods and services).
Our inputs can be tangible (things you can touch like raw materials/machines and intangible (things that can't be touched like ideas, knowledge etc).
When inputs are turned into outputs, outputs should have an exchangeable value. People should want to trade for them and therefore firms should be able to sell them.
For example, if a firm were to make chocolate bars they would need:
Inputs:
Capital (machinery to mass produce chocolates)
Land (raw materials like cocoa beans, milk)
Labour (workers)
Enterprise (an entrepreneur who took a risk needed to sell the product)
Output: a delicious chocolate bar
What is productivity?
Productivity is a way of measuring how efficient the production process is. If something is more productive, it means that it produces more within a given amount of time.
Labour productivity: How many units of output can one worker make in a given period of time
Capital productivity: How many units of output can one unit of capital make in a given period of time
So when a factor of production is more productive, it means that it can produce more than before in the same amount of time.
So being productive is basically about being able to do more with the same factor inputs.
To calculate labour productivity, there are two ways:
Output per worker = Number of units made / Number of workers
Output per hour worked = Number of units made / Total number of hours worked
So how does a firm improve it's productivity?
Offer more training
Employ better quality capital
Employ people with more skills
Specialise and divide up the production process (see our revision page on specialisation)
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