What is productivity?
Production is the total amount of goods or services made. Productivity is how much is made for each unit of input.
- Input: workers, hours, machines, land, raw materials.
- Output: boxes, cars, haircuts, phone calls answered.
A factory can raise production just by hiring more people. Productivity rises only if each person (or each machine) makes more.
Why it matters: higher productivity means a lower cost per unit, so firms can cut prices or earn more profit, pay higher wages, and compete with other countries. For a whole country, higher productivity is the main source of long-run economic growth and higher living standards.
Measuring productivity
Labour productivity = total output ÷ number of workers (or ÷ number of worker-hours).
Capital productivity = output ÷ units of capital (for example, units per machine).
For a country, a common measure is output per hour worked (real GDP ÷ total hours worked).
Measuring is easy for goods (cars per worker) but hard for services: a doctor who sees more patients per hour may give worse care. Quality matters as well as quantity.
Factors that raise productivity
- Education and training: skilled workers work faster and make fewer mistakes.
- More and better capital: modern machines, tools and computers.
- Technology and innovation: robots, software, better ways of working.
- Motivation: fair pay, bonuses, praise, safe working conditions.
- Specialisation and division of labour: each worker does one task and gets very good at it.
- Good management: less waste, lean production, better layouts.
- Infrastructure (for a country): roads, power, internet.
Efficiency, capacity and technology
Efficiency means making output with the fewest resources and least waste.
Capacity utilisation = actual output ÷ maximum possible output × 100. A hotel with 80 of 100 rooms full is at 80%. High utilisation spreads fixed costs over more units, so cost per unit falls. Very close to 100% leaves no time for maintenance and staff get tired.
Labour-intensive production uses a high proportion of labour (hand-made goods, hair salons). It is flexible and good where labour is cheap. Capital-intensive production uses a high proportion of machines (car plants, refineries). It has high set-up cost but very high output per worker and consistent quality.
Technology (robots, automation, online systems) raises productivity but costs money to buy, needs training and may cause job losses.
Try it
In the 3D free play, set 4 workers and technology 1, then 8 workers. Does productivity change? Now raise technology. At home: time how many cards you can fold in 2 minutes. Then fold again using a ruler as a tool. Work out cards per minute both times.
Key formulas and definitions
- Labour productivity = total output ÷ number of workers (or worker-hours)
- Capital productivity = output ÷ units of capital
- Capacity utilisation (%) = actual output ÷ maximum output × 100
- % change in productivity = (new − old) ÷ old × 100
- Labour cost per unit = wage per worker ÷ output per worker
Worked examples
1. 12 workers make 600 shirts a day. Find labour productivity.
600 ÷ 12 = 50 shirts per worker per day.
2. A team works 160 hours in a week and makes 4,000 units. Find output per worker-hour.
4,000 ÷ 160 = 25 units per hour.
3. Productivity rises from 40 to 50 units per worker. Find the % increase.
(50 − 40) ÷ 40 × 100 = 25%.
4. A factory can make 5,000 units a month and makes 3,500. Find capacity utilisation.
3,500 ÷ 5,000 × 100 = 70%.
5. Each worker earns $600 a week and makes 200 units. After training, output is 300 units at the same wage. Find labour cost per unit before and after.
Before: 600 ÷ 200 = $3. After: 600 ÷ 300 = $2. Cost per unit falls by $1.
6. Firm A: 20 workers, 1,000 units. Firm B: 25 workers, 1,100 units. Which has higher production and which higher productivity?
Production: B (1,100 > 1,000). Productivity: A = 50, B = 44 per worker, so A is more productive.
Common mistakes
- Mixing up production and productivity. More workers can raise production while productivity falls.
- Dividing workers by output instead of output by workers.
- Thinking higher productivity always means lower total cost. It lowers cost PER UNIT; total cost may rise if output grows.
- Assuming 100% capacity utilisation is always best. It leaves no room for repairs, new orders or rest.