Productivity is a measure of the efficiency of production. It’s typically calculated as the ratio of output to inputs used in the production process.
Output refers to the goods or services that a company produces, and inputs refer to the resources such as labor, capital, or raw materials used in the production process.
Productivity can be measured in various ways, including:
- Labor Productivity: This is the most common measure of productivity and refers to the amount of goods and services produced per hour of labor. It is calculated by dividing the total output by the total hours of labor.
- Capital Productivity: This refers to the amount of output per unit of capital input.
- Total Factor Productivity (TFP): This measures the efficiency of all inputs to a production process. It is a measure of how effectively the inputs are used in the production process.
Improving productivity is a key goal for many businesses, as it can lead to increased profitability. Businesses can increase productivity in several ways, including investing in better equipment, improving workflows, training staff, or improving working conditions.
On a larger scale, productivity growth is important for economic progress as it means that more goods and services are produced from the same amount of resources, which can lead to improvements in living standards.
Example of Productivity
Suppose a shoe manufacturing company, “Footwear Unlimited,” produced 1,000 pairs of shoes last month using 500 hours of labor. To calculate the labor productivity, you’d divide the total output (the number of shoes produced) by the total input (the number of labor hours used).
So in this case, the labor productivity is 1,000 pairs / 500 hours = 2 pairs of shoes per hour.
This means that, on average, each hour of labor at Footwear Unlimited results in two pairs of shoes being produced.
Now let’s say Footwear Unlimited invests in a training program that results in their workers being able to produce 3 pairs of shoes per hour. After the training, with the same 500 hours of labor, they would be able to produce 1,500 pairs of shoes.
In this case, productivity has increased from 2 pairs of shoes per hour to 3 pairs of shoes per hour as a result of the training. This is an example of how a company can increase its productivity. By making their labor hours more productive, Footwear Unlimited can produce more output without increasing their input, which could lead to higher profits.