Production & Productivity

The Purpose of Business Activity

• The purpose of business activity is to produce goods or services that meet customer needs
• This is accomplished through the process of production
  • The factors of production are combined in such a way so as to minimise the costs and maximise the sales revenue
  • Adding value is the process of taking inputs and combining them in such a way that customers find them useful and are willing to pay more for the end product than the value of the raw materials used to manufacture it

Diagram: The Production Process

The purpose of business activity is to take inputs, add value to them, and create products which meet customer needs

 Diagram analysis

• Raw materials and the other factors of production are used to produce goods and services
• Different types of costs are incurred in production, and when the firm sells its products, they receive sales revenue
  • If the total costs incurred in the process are less than the sales revenue, the firm will make a profit
  • If the total costs incurred in the process are greater than the sales revenue, the firm will make a loss

Production

• Production is the act of adding value to the factors of production (such as capital, and labour) to create the goods/services e.g. using tomatoes & basil to create a soup
  • It is the process of factor conversion of inputs into final product (goods/services)
  • It is a measure of output e.g. 3 cans of soup

• 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

Productivity

• 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 & provides a metric for comparison
  • E.g Capital productivity is output per unit if capital 
• Labour productivity is significant as it is output per worker
  • It is a measure of efficiency e.g. 3 cans produced per worker 
  • E.g After training workers proved to be 27% more efficient in their labour productivity
• Higher productivity is important for a firm & economy for the following reasons
  • It lowers costs & improves a firms national & international ability to compete
  • It allows firms to produce more output with the same input which puts it in a position to generate increased economies of scale
  • Firms can generate higher profits
  • Higher profits may mean that the firms can pay their workers more
  • Higher profits may mean that the government revenue from corporation tax will increase
  • An improved ability to compete in international markets will help to generate economic growth 

Worked Example

The table shows the number of pairs of luxury wool socks produced by Scotty Socks Ltd. in 2021 and 2022. 

Year	Units Produced
2021	46,000
2022	69,000

In 2021, Scotty Socks employed 50 staff. In 2022, the number of staff employed by the business increased by 20%.

Calculate the percentage change in labour productivity between 2021 and 2022.   (4)
 

Step 1: Calculate the labour productivity for 2021

Step 2: Calculate the labour productivity for 2022

Step 3: Calculate the percentage difference between the two years ((new-old) / old)

Step 4: Identify whether the percentage difference is an increase or decrease

Labour productivity has increased from 920 to 1,150 units so it is a 25% percentage increase  (1 mark)