Lesson 8 - Productivity

INTRODUCTION CONCEPTS
Economics Investment in capital goods
Although the problem of scarcity can never be Investment in human capital
eliminated, it can be moderated by finding Productivity
ways to increase productivity. Productivity is Specialization and division of labor
the amount of goods and services produced (or
output) per unit of productive resources used CONTENT STANDARDS
(or input) in a specific period of time such as 6. When individuals, regions and nations
one hour. Productivity can be increased by pro- specialize in what they can produce at the
ducing more goods and services with the same lowest cost and then trade with others,
amount of resources, or by producing the same both production and consumption increase.
amount of goods and services with fewer
resources. As productivity increases, produc- 13. Income for most people is determined by
tion costs for each unit of a good or service the market value of the productive
decrease. This makes producers more competi- resources they sell. What workers earn
tive in the marketplace and translates into depends, primarily, on the market value of
higher wages for workers at the national level. what they produce and how productive
In individual markets, however, productivity they are.
increases can sometimes reduce the number of
workers employed. 15. Investment in factories, machinery, new
technology, and the health, education and
Reasoning training of people can raise future stan-
The choices producers make in attempting to dards of living.
boost productivity have far-reaching implica-
tions at the macro level. Over time, both per- OBJECTIVES
sonal and national living standards are direct-
Students will
ly related to labor productivity. For a country
1. Define labor productivity as output per
to be able to consume at high levels, it must
worker.
have a highly productive labor force.
Productivity can be increased by investing in
2. Explain how the division of labor and
capital goods such as factories, machines and
investment in capital goods improve pro-
tools. Individual workers can also increase pro-
ductivity.
ductivity and enhance their own earning
power by investing in their human capital
3. Explain why increased productivity is
through education and training.
important to individuals and to the econo-
my as a whole.

LESSON DESCRIPTION
Working in small groups, the students partici-
pate in a production simulation to determine
the effects of specialization on labor productivi-
ty, the division of labor, and investment in
human capital and capital goods.

ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y. 67

LESSON 8 - PRODUCTIVITY

TIME REQUIRED dards will be rejected and thrown away;

60 minutes only books that pass inspection and are
accepted will count toward their total.
MATERIALS
4. Distribute the paper, paper clips and one
1. Visual 8.1
pen to each company. Allow time for each
student in the class to make a practice
2. Large supply of 8.5Ó x 11Ó paper (scrap
book. Check to make sure all the students
paper is fine)
understand what they are to do. Discard
all practice books at the end of this period.
3. Large supply of paper clips and pens
ROUND 1
4. One copy of Activity 8.1 for each student
5. Inform the students that during Round 1,
5. (Optional) One pair of gloves per group
each worker in a company is a bookmaker.
Each bookmaker produces the entire book
PROCEDURE
alone. Bookmakers will share materials
1. Divide the class into book companies of and capital goods (the pen), but not labor.
four to five students per company. Have
the students in each company arrange 6. Give the companies three minutes to pro-
their desks to form a common work area. duce books. Quickly check each companyÕs
Ask the students to name their companies. completed books and reject books that do
not pass inspection. Discard all rejects and
2. Tell the students they are going to produce partially completed books.
books. Demonstrate how to construct a
book as you explain the process. Tear a 7. Distribute a copy of Activity 8.1 to each
piece of paper in half, put the halves student. Using Visual 8.1, go over the
together, and tear the two halves in half sample column with the class so all the
again, making four quarters. Put the four groups understand how to record their
quarters together and fold them in the data. Then ask the groups to calculate the
middle, making a 14-page book plus front Round 1 data for their company.
and back covers. Place a paper clip in the A. Wages (line 2) are $1.00 per worker
upper left-hand corner of the book to hold for each round.
it together. Write the name of the compa- B. Rent (line 3) is $2.00 per round, no
ny on the front cover and number the even matter how many workers or desks the
(left-hand) interior pages from 2 through company has.
14, placing each number in the bottom C. Investment in capital (line 5) is the
left-hand corner of the page. Explain that number of pens times 50 cents, which is
this is a completed book. the cost of one pen.
(Optional) Have the students write ÒQuiz D. The cost of materials (line 7) is 25
BookÓ on the cover, above the company cents for the paper and paper clip used in
name. Save completed books and use them each accepted book.
later for pop quizzes. E. Labor productivity (line 10) is the
number of accepted books per worker in
3. Tell the students that they will have three the three-minute time period.
minutes to produce as many books as they Note: The students may question why the
can. Inform them that you or students you costs of the materials for unfinished books
choose will serve as the quality-control are not included in line 7. Tell them that
officers and inspect all finished books. Any these costs are not included here to simpli-
books that do not meet production stan- fy the calculations in the activity and that

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 PRODUCTIVITY - LESSON 8

a real business would use the unfinished dents purchase pens, give the companies
goods in inventory for future production. time to analyze their production process
They may also question why only books and reorganize if they so desire.
that pass inspection (accepted books) are
counted toward the productivity number. 13. Repeat step six and have companies
Tell them that a real business can sell only record their data on their Activity 8.1
goods that meet required standards. handouts in the Round 3 column. Use
Visual 8.1 to help with the computations
8. Ask the students, ÒWhat is another way as necessary.
you could organize this book production
process?Ó Students will usually suggest 14. Once the students have completed filling
dividing the labor and specializing. in their data, discuss the following:
A. Explain that one definition of pro-
ROUND 2 ductivity is the ratio of the amount of out-
put produced to the number of inputs
9. Once again, limit each company to only used. Ask the students to explain their
one pen, but allow the students to intro- companyÕs productivity ratio on line 10.
duce specialization and division of labor. The productivity measure is labor pro-
Allow time for the students to discuss ductivity or output per worker in a
breaking down the book production into a three-minute time period. The number
series of steps, and let each group member of accepted books produced in three
specialize in doing one or two specific minutes was divided by the number of
steps. Point out that, as a specialist, each workers in each company. Point out
student will complete only a part of the that this ratio rises as productivity rises.
production process. Also, if we looked at labor productivity for
all goods and services, not just books, as
10. Repeat step six and have the students labor productivity increases, the goods and
record their data on Activity 8.1 in the services available for people to consume
Round 2 column. Use Visual 8.1 to help would increase. This means that, on aver-
the students with the computations as age, peopleÕs standard of living would
necessary. increase.
B. What happened to your productivity
11. If most companies do not experience an between Round 1 and Round 2? Between
increase in productivity between Rounds 1 Round 2 and Round 3? Why did this
and 2, repeat Round 2. This is often neces- occur? In most cases, productivity
sary because the specialists need practice should increase between Rounds 1 and
in their specific assignments (investment 2 because of specialization and divi-
in human capital), the assembly line sion of labor. Sometimes this does not
needs to be reorganized or the specialists happen, however, because of lack of
fail to cooperate. skills, lack of cooperation among the
assembly-line workers or inexperience.
ROUND 3 By Round 3, companies should have
seen an increase in productivity as
12. Now allow each company to ÒpurchaseÓ specialists have more practice and as
new capital resources: Offer to sell them the companies refine the assembly-line
as many pens as they want. Each pen process.
costs 50 cents. Point out that pens are the C. What happened to the quality of the
companiesÕ capital goods and that by pur- books between Rounds 1 and 3?
chasing them, a company would be invest- Typically, fewer and fewer books will
ing in its physical capital. After the stu- be rejected, and the overall quality

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LESSON 8 - PRODUCTIVITY

will improve. include some mention of the following.

D. What effect did investing in addi- Advantages: Specialists become very
tional capital goods (pens) in Round 3 skilled at doing one step of the pro-
have on productivity? Investment in duction process, product quality
physical capital should have improves and productivity rises.
increased productivity. Disadvantages: Workers may get easily
E. What effect did increased productivi- bored with their jobs, problems occur
ty have on average cost (line 9 of Activity when a specialist is absent and some
8.1)? Average cost should decrease. workers may lose their old jobs
Why is this important? Lower average because of productivity increases.
cost means the producers can compete J. What other things could the book
with other book companies more effec- companies have done to increase their pro-
tively, allowing them to stay in busi- ductivity? Provide practice time or on-
ness longer and perhaps also earn the-job training for the specialists,
higher profits. which would be an investment in
F. What effect will increased productivi- human capital, or invest in even more
ty have on wages in the long run? More- capital goods such as scissors or a
productive workers will receive higher paper cutter.
wages and have greater job security K. What things should the company
because they add more to the firmÕs consider before investing in capital
revenue while lowering its average resources such as a paper cutter?
production costs. Less-productive It should weigh the cost of the paper
workers may be fired and have to cutter, the cost of training workers to
search for jobs. It is possible that if use the paper cutter and the risk
productivity increases for a particular involved in borrowing money to pur-
product or factory, the number of chase it against the anticipated bene-
workers employed will decrease if the fits of increased productivity.
firm cannot sell the additional out- L. What is the opportunity cost of a
put. firmÕs decision to invest in capital?
G. What will happen if labor productivi- The opportunity cost is what the com-
ty increases in the overall economy? pany would have done with the money
At this level, productivity increases had it not made a capital investment.
translate into higher average wages, M. Why would it be important for a
more consumption and a higher mate- nation to increase productivity?
rial standard of living. Although Productivity increases can mean high-
there may be concerns about selling er individual wage rates. If many of a
more units of some particular product countryÕs people are receiving higher
made at one factory, there is not a wages, this leads to increased con-
concern about people wanting to buy sumption, increasing aggregate
more output of all goods and services. demand. This results in a rising gross
H. What costs did the companies incur domestic product because more people
by attempts to increase productivity? working with more money in their
Investing in additional capital pockets purchase more and more
resources Ð the extra pens Ð increased goods and services. This raises the
total costs but should lower average average standard of living in a coun-
production costs if productivity try. Additionally, when productivity
increased. gains result in a greater quantity of
I. What are the advantages and disad- goods and services being produced, a
vantages of specialization and division of nation may be able to become more
labor? Answers will vary but should active in the international-trade

70 ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y.

 PRODUCTIVITY - LESSON 8

arena, further raising the peopleÕs

average standard of living.
15. (Optional rounds) Implement the situa-
tions described below in one or more book
companies, and then discuss changes in
productivity.
A. Allow companies to fire any workers
they do not want to employ. Permit the
fired workers to form new companies.
B. Inform companies that a new gov-
ernment regulation requires all workers to
wear gloves because of the toxic nature of
the paper used in the production process.
Distribute a pair of gloves to each of the
companies.
C. Inform the companies that a new
union contract states each worker must
receive a one-minute break during each
production round.

CLOSURE
Discuss the following:
1. What is labor productivity?
Output per worker

2. How do specialization, division of labor,

and investment in human capital and cap-
ital goods affect productivity?
Productivity increases.

3. What are the advantages to a firm of

increasing productivity?
Productivity increases lead to lower
average production costs, and product
quality typically improves.

4. Why is increasing productivity important

to individuals and to the economy?
Increasing productivity allows for
higher consumption and higher
income levels Ð in other words, a high-
er standard of living.

ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y. 71

LESSON 8 - PRODUCTIVITY

VISUAL 8.1
PRODUCTIVITY DATA

Name of book company

Sample Round 1 Round 2 Round 3

1. Number of workers 4

2. Wages ($1 per worker) $4.00

3. Rent for factory (desks) $2.00 $2.00 $2.00 $2.00

4. Capital goods (number of pens) 1

5. Investment in capital goods ($0.50 per pen) $0.50

6. Number of accepted books 4

7. Cost of materials ($0.25 per accepted book) $1.00

8. Total cost of accepted books $7.50

Wages (line 2) + rent (line 3) + investment in
capital goods (line 5) + materials cost (line 7)
9. Average cost per accepted book $1.88
Total cost (line 8) Ö accepted books (line 6)

10. Productivity: output per worker in 3 minutes 1

Accepted books (line 6) Ö number of
workers (line 1)

72 ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y.

 PRODUCTIVITY - LESSON 8

ACTIVITY 8.1
PRODUCTIVITY DATA
Name of book company

Sample Round 1 Round 2 Round 3

1. Number of workers 4

2. Wages ($1 per worker) $4.00

3. Rent for factory (desks) $2.00 $2.00 $2.00 $2.00

4. Capital goods (number of pens) 1

5. Investment in capital goods ($0.50 per pen) $0.50

6. Number of accepted books 4

7. Cost of materials ($0.25 per accepted book) $1.00

8. Total cost of accepted books $7.50

Wages (line 2) + rent (line 3) + investment in
capital goods (line 5) + materials cost (line 7)
9. Average cost per accepted book $1.88
Total cost (line 8) Ö accepted books (line 6)

10. Productivity: output per worker in 3 minutes 1

Accepted books (line 6) Ö number of
workers (line 1)

ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y. 73