Production and Productivity

Production and productivity

These two words sound similar and mean different things. Getting them the wrong way round is the most common error in this topic.

• Production is the total output produced.
• Productivity is output per unit of input, usually output per worker, or output per hour.

A firm that hires 10 more workers and produces more has raised production. Only if each worker now produces more has it raised productivity.

This matters because only higher productivity lowers the cost of making each unit. That is what makes a firm more competitive, and what allows wages to rise without prices rising.

What raises labour productivity:

• Education and training, so workers are more skilled.
• Better machinery and technology: more capital per worker.
• Better management and organisation.
• Motivation: pay, conditions, job security.
• Specialisation and the division of labour.

The sectors of the economy

As countries develop, the balance shifts from primary → secondary → tertiary. Low-income countries have a large primary sector; developed economies are dominated by services.

This shift is called de-industrialisation when the secondary sector shrinks. It raises average incomes, but it also causes structural unemployment, because workers whose skills suited manufacturing cannot easily move into services.

Specialisation and the division of labour

Specialisation means concentrating on producing a narrow range of goods or tasks.

The division of labour is specialisation applied to workers: breaking production into separate tasks, with each worker doing one of them.

Advantages:

• Workers become quicker and better at their task through repetition.
• Less time is wasted moving between tasks and tools.
• Training is cheaper, because each worker learns only one job.
• It makes machinery worthwhile, since a machine can be built for one repeated task.
• Overall, output per worker rises, productivity increases.

Disadvantages:

• Work becomes boring and repetitive, so motivation and quality fall and workers leave.
• Workers become occupationally immobile; they have only one narrow skill, so if the industry declines they struggle to find other work.
• Interdependence: if one stage stops, the whole production line stops.
• Less variety in the goods produced.

Economies and diseconomies of scale

Economies of scale are the cost advantages a firm gains as it grows: as output rises, the average cost per unit falls.

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Average cost = total cost ÷ output. If total cost rises more slowly than output, average cost falls.

Types of economies of scale:

Diseconomies of scale happen when a firm grows too large and average cost starts to rise again:

• Communication problems: messages get distorted through layers of management, and decisions are slow.
• Coordination problems: it becomes hard to organise and monitor a huge organisation.
• Motivation problems: workers feel like a small part of something huge, so effort and morale fall.

Put together, the average cost curve is U-shaped: falling as economies of scale are gained, then rising as diseconomies set in.

Worked example

A small bakery with one shop expands into a chain of fifty shops with a central factory.

1. Output rises enormously
2. the firm can now buy flour in bulk at a discount (purchasing economies)
3. it can afford large industrial ovens that a single shop could never justify (technical economies)
4. it can advertise on television, spreading that cost over far more loaves (marketing economies)
5. and it can borrow more cheaply to fund expansion (financial economies).

1. Average cost per loaf falls
2. so the firm can charge lower prices than small independent bakeries and still make a profit
3. it gains market share.

Evaluation.

• The savings only continue up to a point. Beyond a certain size, diseconomies of scale appear: managing fifty shops and a factory is far harder than managing one, communication between head office and shops breaks down, and staff feel less valued.
• The cost saving only helps if the extra bread can actually be sold. If demand does not grow with capacity, the ovens run half empty and average cost rises instead.
• Consumers may gain from lower prices, but if the chain drives independent bakeries out of business, there is less choice, and prices may rise later once competition has gone.
• Something is lost that does not appear in the cost figures: the personal service and local character of a small bakery.

Judgement: growth lowers average cost while the firm is still gaining economies of scale and can sell the extra output. Beyond that point, growing further raises costs rather than lowering them.

Common exam mistakes

• Confusing production (total output) with productivity (output per worker).
• Saying economies of scale mean total costs fall. Total cost rises; it is average cost that falls.
• Listing types of economies of scale without explaining how each lowers average cost.
• Confusing diseconomies of scale with simply making a loss.
• Forgetting the disadvantages of the division of labour, especially occupational immobility.
• Mixing up the sectors, a bakery shop is tertiary (retail), a bread factory is secondary.

Exam technique

Define productivity as output per worker every time, that precision is often a mark in itself.

When explaining an economy of scale. Always finish the chain: "buying flour in bulk earns a discount, so the cost of flour per loaf falls, so average cost falls."

For evaluation, use the U-shaped average cost curve, growth helps up to a point and hurts beyond it, and ask whether the firm can actually sell the extra output.

Quick revision

• Production = total output. Productivity = output per worker.
• Productivity rises with education, training, better capital, management and motivation.
• Sectors: primary (raw materials), secondary (manufacturing), tertiary (services).
• Development shifts the balance primary → secondary → tertiary.
• Division of labour raises productivity but causes boredom, occupational immobility and interdependence.
• Economies of scale = average cost falls as output rises: purchasing, technical, financial, marketing, managerial, risk-bearing.
• Diseconomies of scale = average cost rises: communication, coordination, motivation.
• The average cost curve is U-shaped.

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