Productivity – how efficiently resources are actually being used (output per unit of input e.g. worker).
High productivity means more output with the same amount of input over the same period of time, this reduces average costs. On the other hand, lower productivity means less output with the same input and period of time which in turn increases costs. This requires a larger input/period of time to reach the same output.
Labour productivity is equivalent to how much real GDP is produced per unit of labour per hour. This can be used to compare how efficient countries are on an international level.
The reduction in average costs means that there are lower production costs which may be passed onto customers. This may then increase demand in the economy which then could cause higher levels of employment, possibly making the firm more internationally competitive, especially if they are more productive.
The reduction in costs may also mean that they have bigger profit margins, which they can use to pay their employees higher wages. They may also pay them more as they are more valuable as they are producing more. They will have more disposable income and will spend more as well as having a higher standard of living. This will then lead to higher GDP with the higher levels of spending.
FACTORS IMPACTING PRODUCTIVITY
- Larger quantities of capital stocks
- Worker training
- Technological development of capital machinery
- Investment in human capital through education and healthcare
- Changes in the level of investment – access to credit etc.
- Machine innovation for production process can mean higher allocative efficiency
Link between productivity and competitiveness
As productivity impacts the cost of producing each unit of output, it directly relates to how competitive a business is. If they have higher costs due to low productivity, they will have to pass on these higher prices to customers. This then makes them less competitive against rivals which are more efficient and charge lower prices.
Capital intensive production – uses large amounts of capital (machines) equipment and relatively little labour.
Labour intensive production – uses large amounts of labour and little capital in production e.g. dentistry.
| ADVANTAGES | DISADVANTAGES | |
| CAPITAL INTENSIVE | · Very fast continuous production
· Reduced unit costs leading to higher profit margins · Economies of scale |
· High cost of purchasing/ maintain machines
· Less flexibility – uniformity · Uninteresting work for employees · Breakdowns lead to a pause in production |
| LABOUR INTENSIVE | · Flexibility in products made – tailored to customers
· Quality/unique products |
· Salaries of skilled workers are expensive
· Workers can go on strike · Time consuming to produce |