Production & Productivity (Cambridge (CIE) IGCSE Economics): Revision Note

The difference between production and productivity

• The terms 'production' and 'productivity' are fundamentally different

• Production is the act of adding value to the factors of production to create goods and services, e.g., using tomatoes and basil to create a soup

  • It is the process of factor conversion into goods/services

  • It is a measure of output, e.g., 3 cans of soup

• Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of input

  • It calculates how efficiently resources are being used in the creation of goods/services and provides a metric for comparison, e.g., after training, workers proved to be 27% more efficient in their productivity

  • It is a measure of efficiency, e.g. 3 cans produced per worker 

Influences on production and productivity

Influences on production

• Production is often influenced by the state of the economy

  • During a recession production falls

  • During a boom period, production increases

• As production is dependent on the demand for goods/services, any change to any of the conditions of demand will result in changes to production

• As production is also dependent on the supply of the factors of production, any change to any of the conditions of supply will result in changes to production

Influences on productivity

• Higher productivity is important for firms and economy for the following reasons:

1. It lowers costs and improves a firm's national and international ability to compete

2. It allows firms to produce more output with the same input, which puts it in a position to generate increased economies of scale

3. Firms can generate higher profits

4. Higher profits may mean that the firms can pay their workers more

5. Higher profits may mean that the government revenue from corporation tax will increase

6. An improved ability to compete in international markets will help to generate economic growth

The Influences on productivity growth

Effects of changes in investment on productivity

1. Increased investment → higher productivity

• When firms or governments invest more, particularly in capital goods, productivity tends to rise. Here’s how:

  • Better machinery and technology

    • Investment in modern equipment and automation allows firms to produce more output with the same amount of labour

  • Improved infrastructure

    • Government investment in transport, power or digital infrastructure can reduce delays, improve connectivity and raise the productivity of entire industries

  • Training and human capital

    • Investment in training programmes and education raises worker skill levels, enabling them to perform tasks more efficiently

2. Falling investment → slower productivity growth or decline

• When investment falls, especially over a prolonged period, it can have negative effects:

  • Aging capital stock

    • Outdated or worn-out machinery leads to lower efficiency, more breakdowns, and higher repair costs

  • Skills gap

    • Without training investment, workers may lack the skills needed for new technologies or methods

    • Firms that cut investment in R&D risk falling behind rivals in productivity and product quality