Production is total output; productivity is output per worker or per hour, and investment usually raises it.
Production is the total amount of goods and services a firm or economy makes. Productivity is output per unit of input, usually output per worker per hour. A firm can raise production by hiring more workers even if productivity does not change.
Productivity rises with better education and training, better technology and machines, better management, and more motivated workers. Healthier workers are also more productive.
Investment means spending on capital goods, such as new machines or software. It usually raises productivity because each worker has better tools. Higher productivity lowers the cost of each unit, so firms can cut prices, raise wages or earn more profit.
Investment also has costs. It takes time to install, workers need training, and the firm must be sure the extra output can be sold.
- Production
- Total output.
- Productivity
- Output per worker or per hour.
- Raises productivity
- Training, technology, investment, better management, motivation.
Worked example: Calculating productivity
A packaging factory has 20 workers who make 4,000 boxes in an 8-hour shift. After buying a new folding machine, the same workers make 6,400 boxes.
- Before: productivity = 4,000 / (20 x 8) = 25 boxes per worker per hour.
- After: productivity = 6,400 / (20 x 8) = 40 boxes per worker per hour.
- Production rose by 2,400 boxes and productivity by 60%, with no extra workers.
- Effect: the cost of each box falls, so the firm can compete on price.
Watch out for this
If a firm produces more, its productivity must have risen.
Production can rise just because more workers are hired. Productivity rises only if output per worker, or per hour, goes up.
Check your understanding
A firm hires 10% more workers and output rises by 10%. What has happened to labour productivity?
- It has stayed the same.
- It has risen by 10%.
- It has fallen by 10%.