Production and Productivity

Production

Economics is the study of how human beings satisfy their unlimited wants by using the limited resources they have. Production in Economics is any activity that is done to satisfy people’s wants. Production also involves giving services. It is also defined as the process of converting raw materials into finished goods suitable for human consumption.

Therefore production is measured in numbers and quantities. For example, a factory maybe able to produce 100 million cans of tuna in a month. A worker at a bakery maybe able to make 10 cakes in an hour.

Productivity

Since resources are limited, we are also concerned about how well the resources are used to satisfy our wants. Therefore we can come up with some comparison of two firms which produce similar products.

For example, two factories which are able to produce 100 million cans of tuna a month. However when we look at their input, we can come up with some differences. Factory A uses 100 workers, while factory B uses 200 workers. Therefore if we calculate the worker efficiency, factory A is better because it is able to produce the same output with fewer workers compared to factory B.

Productivity therefore measures how efficient are the resources used.

To calculate productively based on time the most used formula is; Productivity = output/hours.

To calculate productivity based on quantity of labour;

Productivity = output/number of workers.

Importance of Productivity
Productivity increases output. High productivity results in lower cost per unit of output resulting in higher levels of profit for a business. For example, a factory worker can produce 10 items in an hour and he subsequently produces 20 units in the same hour after some training. His productivity has doubled and the business will benefit from a fall in unit cost as more units are being produces at the same costs of production.
Higher profits for the firm will mean more funds available for its expansion, new business ventures and community support. It may also wish to pass on the benefits of lower costs to consumers in the form of lower prices.

Next topic: Total and average cost, fixed and variable cost

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