PRODUCTIV

ITY AND
EFFICIENCY
MEASUREM
ENT
Micro Economics
LECTURE BY SAMAR MASOOD
PRODUCTIVITY
 Organizations and Individuals must decide not only WHAT to produce for the market,
but also HOW to produce it in the MOST EFFICIENT or LEAST COST manner.

 Economics offers widely accepted tools for judging whether the production choices are
least cost and effective.

 A production function relates the most that can be produced from a given set of inputs.
 THEORY OF PRODUCTION
Production in Economics can be
defined as an organized activity of
transforming physical inputs
(resources) into outputs (finished
products), which will satisfy the
products’ needs of the society.
 Production is an act of creating value that satisfies the
wants of an individual.
 In economics, Production is a process of transforming
tangible and intangible inputs into goods or services.
THEORY OF PRODUCTION
 Theory of production, in economics, is a concept by which a business firm decides
how much of each product that it sells (its “outputs” or “products”) it will produce, and
how much of each kind of labor, raw material, fixed capital good, etc., that it employs
(its “inputs” or “factors of production”) it will use.
Suppliers
Company Customers
• Factors of Production
• Household
• Energy
• Public Production
• Money Market Production
• Producers
• Services

Input Output
Production Producer
Function • Employees
• Society
• Owners
PRODUCTION FUNCTION

Units produced (Output) “O”

Productivity =
Input used “I”
 Input Used = Factors of Production that are used for producing the final output with
the main aim of earning an economic profit. The factors of production are:
 Land
 Labor
 Capital
 Entrepreneur
THEORY OF PRODUCTION
Land Labor Capital Entrepreneur
• Utilized to produce • Physical and mental • Wealth created by • Coordinating,
income called rent. effort of the human human beings. Management, and
• Available in fixed being. • Most important factor Supervision.
quantity. • Unskilled/skilled for production of • A person who creates
• No supply price. labor. goods/service. an enterprise.
• Permanent input. • Supply is affected by • Physical Capital • Success/failure
• Massive factor and is the change in its price. (buildings, machines, depends on him.
immobile. • Labor is perishable. tools, equipment). • Initiates business.
• Multiple uses. • Mobile input. • Human Capital • Take risks.
• Heterogeneous. • Active factor. (knowledge and skills The return for
The return for the land The return for labor is of human resource) entrepreneur is called
is called Rent. called Wages and The return for capital is profitable business.
Salary. called Interest.
PRODUCTIVITY CALCULATIONS
 Labor Productivity

Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity (partial factor)

PRODUCTIVITY CALCULATIONS
 Labor Productivity

Units produced Uses a single

Productivity = “Input” factor
Labor-hours used
e.g., output/labor-
hour,
1,000 sales/employee
= = 4 units/labor-hour
250

One resource input  single-factor productivity (partial factor)

PRODUCTIVITY CALCULATIONS

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous

Multiple resource input  Multi-factor productivity

PRODUCTIVITY CALCULATIONS

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous

Multiple resource input  Multi-factor productivity

Uses more than one “Input” factor; e.g.

output/costs (labor, materials, and overhead).
 PRODUCTIVITY CALCULATIONS

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous

Multiple resource input  Multi-factor productivity

 If all the input factors in a

production process are used Uses more than one “Input” factor; e.g.
than it will be called Total output/costs (labor, materials, and overhead).
Factor Productivity.
 PRODUCTIVITY IMPROVEMENT – EFFICIENCY
 Productivity Improvement (PI) is the result of managing and intervening in
transformation or work processes to make it more efficient.
 How much more can we produce with a given level of inputs?
 How much input reduction is possible to produce a given level of observed output?
 How much more revenue can be generated with a given level of inputs? Similarly how much
reduction in input costs be achieved?
 PI will occur if:
PRODUCTIVITY EXAMPLE
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity =
32 labor-hrs
PRODUCTIVITY EXAMPLE
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = = .25 titles/labor-hr
32 labor-hrs
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

= = .4375 titles/labor-hr
productivity 32 labor-hrs
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity =
$640 + 400
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

productivity =
$640 + 800
PRODUCTIVITY EXAMPLE
Old System:

Staff of 4 works 8 hrs/day 8 titles/day

Payroll cost = $640/day Overhead = $400/day
New System:

14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

productivity = = .0097 titles/dollar
$640 + 800
THEORY OF PRODUCTION
 Production in Economics is a very important economic activity.
 Organizations engage in production for earning maximum profit, which is the difference
between the cost and revenue. Therefore, their production decisions depend on the cost
and revenue. The main aim of production is to produce maximum output with given
inputs.
Profit = Revenue – Cost
Profit = Benefits – Cost
 One of the principal concerns of business managers is the achievement of optimum
efficiency in production by minimizing the cost of production.
THEORY OF PRODUCTION

Practice Problems