Production and Productivity

Chapter 6

PRODUCTIVITY AND PRODUCTION ROAD MAP

Productivity

Industry Production

Farming Production

Easy examples of Productivity

Labor Productivity

Productivity in the US2 Reasons for IncreasingUS Productivity

2 Reasons for IncreasingUS Productivity

PRODUCTIVITY AND PRODUCTION ROAD MAP

Continued!!!Profit Maximization on the Farm

Demand for Farm Products

Supply for Farm Products

Organizing Production

Things to consider when organizing productionLaw of

Diminishing Returns Advantages for Expansion When Things Get Too Big

Productivity

Productivity can be measured as the level of output per unit of input

BUT WAIT!!!!!!!!!!!!!!!!!!

In economics, productivity measures the efficiency with which we produce goods and services Productivity increases have enabled today’s factory

workers, transportation services, and other entities to produce more in fewer hours then in years gone by.

For example…

Yesterday Vs. Today

VS

Yesterday Vs. Today

VS

Check It Out

Industry Production

Industry production has changed significantly since the first half of 1800’s how?

Farming Production

Farming production has changed significantly since the first half of 1800’s how?

Easy Examples of Productivity

Productivity, again, is the efficiency of a factor of production, measured in terms of units of output per every unit of input

Examples include…

Labor Productivity

Labor Productivity is expressed as the output per worker per worker This is the measure that is most frequently used to

gauge economic efficiency

Example: People fed by one US Farmer In 1900- 7 people were fed by 1 farmer In 1950- 16 People were fed by 1 farmer In the 2011- At least 142 people were fed by 1 farmer

WHY?????

Productivity in the US

The US experienced the longest period of prosperity in peacetime history from 1991-2000 All economic progress had an upward trend

Every year from 1900, US productivity has increased almost 2% every single year. Why?

4 Reasons

Reasons for the US Increasing in Productivity

1. The Quality of the Work Force: Since 1980, the average US worker has been better

educated and has more experience then his or her predecessors

Trade schools, the military, colleges/universities, internships, apprenticeships, government funding, charitable funding etc are all reasons why.

2. Increasing capital investment per worker Labor productivity increases when workers have more

capital, human or physical capital, to work with. Since 1995, much money from the American GDP has been

used as investment in businesses and industries.

Reasons for the US Increasing in Productivity

3. Infrastructure: The record shows that investment in infrastructure:

items used to communicate and transport in a country, have contributed to the growth of the US

Airports

Fiber Optical Wires

Cell Phone Towers

Reasons for the US Increasing in Productivity

4. Innovations Since its early colonial day, the US has always been an

incredibly gifted country of innovators and inventors

To keep that tradition going, the federal and private spending on research and development of goods and services is equal to 2.5 % of the total US GDP

That is more money then Japan, Germany, and France… ALL COMBINED

http://en.wikipedia.org/wiki/Timeline_of_United_States_inventions_(1890%E2%80%931945)

Profit Maximization on the Farm

We already know a farmer today produces enough food for 142 people, where in 1940 that same average farmer produced just enough for 12

How is this possible?

Like all entrepreneurs, farmers strive to maximize profits Unlike other entrepreneurs, farmers have very little control on

the supply of, demand for, and the price of their products A main reason for this lack of control is there is both inelastic

supply and inelastic demand for farming products…

Inelastic Demand for Farm Products

Although people will buy more farm products at a lower price, there is a limit to how much any of us can eat at a particular time

How is this possible? For example: it is unlikely that your family will buy

twice as much bread, milk, or lettuce if the prices are reduced by half

Your family is likely to buy more bread, milk, and lettuce, but definitely not enough to make up for the price decrease for farmers

Inelastic Supply for Farm Products

Once crops are planted or the size of a farmer’s herd is established, there is little that farmer can do to increase or decrease production until the next season

How is this seen? Farmers follow a “Boom or Bust” pattern where they make it,

expand, and become successful or can be “busted” by their farms

Regardless of an optimal price or not, farmers have little choice but to plant their crops and hope for the best instead of not planting their crops at all

Organizing Production

As entrepreneurs get their business plans together, they look to organize Land, Labor, Human Capital, and Physical Capital (Factors of Production) to create the maximum size profit they can make.

Organizing production could mean huge profits, which is the life blood of private enterprise

With this organization comes some things to consider…

Things to Consider When Organizing Production

Take a new factory for example: Land/Building: Should we buy or rent, build/move into a new

building?

Machinery: Should we have unskilled laborers hand making these products or machinery and skilled laborers operating them

Raw Materials: Should we buy enough to carry us through for a few years or reorder from week to week? (Bulk Orders to save money)

Products: Should we manufacture plastic and/or metal models? How many different models will we offer?

Law of Diminishing Returns

When we add additional factors of production such as workers or machinery, productivity usually increases

However, there is a point where the addition of input no longer helps and ends up costing more then if it wasn’t added at all

For example: A new item on a menu that doesn’t sell

Law of Diminishing Returns

Law of Diminishing Returns when this point is reached and output per worker begins to decline.

This can happen with adding more workers, machinery, stores, locations, delivery trucks etc.

Expansion

As a company grows, expansion occurs.

Expansion is not only with buildings, or additional goods/services offered but can also mean a “Division of Labor” throughout a company.

Expansion

Division of Labor is one of the principle advantages of expansion

Division of Labor refers to taking the total production process and now breaking it down into a series of simpler tasks

Expansion (Division of Labor)

Simplifying these tasks means expansion has the following advantages: As the tasks become simpler, training becomes

simpler With the task being subdivided its easier to perform Simple tasks means management can hire less skilled

workers for lower wages. Management can now simplify and focus to specialties

such as Quality control Communications Advertising International Sales

Other Advantages of Expansion

Quantity Discounts- Large firms can obtain their raw materials at a lower cost then small ones. Suppliers are eager to keep their bigger

customers and may offer them quantity discounts.

For example:

AND

Other Advantages of Expansion

Availability of Specialized Material- Large scale production and specialized divisions of labor make more the practical use of specialized machinery.

For example: large automobile manufacturers can afford to buy very expensive laser equipment to weld joints onto an automobile frame. A small firm would not be able to

Other Advantages of Expansion

Research- can lead to the development of many new products and methods of production

Development- development can lead to finding uses for products that go beyond the intentional use of the company’s original products

By-Products- Formerly discarded products, such as orange peels for fertilizer, or meat packing waste into glues, fertilizers, and soaps, are sold to other companies for materials and the parent company makes more profit from their waste

When Things Get Too Big…

Companies are always looking to grow, but unit production costs are key measurements on a companies success.

Unit Production Costs- are the costs of producing an item. When these stop decreasing, and start increasing a

company has “over-expanded” and needs to cut back.

When Times Don’t Change…

In 1942, Harvard economist Joseph Schumpeter came up with a concept of “Creative Destruction”

“Creative Destruction”

Creative Destruction is the idea that capitalism is in a constant state of change in which innovation destroys established enterprises and yields new ones

“Problems arise when successful firms devote their energies to defending their old operations rather than adapting to change.”

Such as these items…

Ghosts of Products Past