Explain productivity and efficiency, how labour productivity is measured, the ways a business can raise productivity, and why higher productivity lowers unit costs

What this dot point is asking

This outcome wants you to explain productivity and efficiency, to measure labour productivity as output per worker, to describe ways to raise productivity, and to explain why higher productivity lowers unit costs. The central idea is that productivity is about getting more output from the same resources, which cuts the cost of each unit and makes a business more competitive.

The answer

Productivity and efficiency

Productivity measures the output per unit of input in a given time. The most common form is labour productivity - output per worker. Efficiency means producing with the least waste of resources (time, materials, money). A more productive, efficient firm makes more, or the same, with fewer inputs.

Measuring labour productivity

The standard measure is:

For example, 6,000 units made by 30 workers gives $\frac{6{,}000}{30} = 200$ units per worker. A rise in this figure means each worker is producing more.

Ways to raise productivity

• Training - skilled workers work faster and make fewer mistakes.
• Better technology and machinery - each worker produces more with modern equipment or automation.
• Improved motivation - through fair pay, bonuses, good conditions and job enrichment, so workers try harder.
• Better organisation - improving the layout of the workplace and the flow of production reduces wasted time and movement.

Why higher productivity lowers unit costs

When output per worker rises, the same labour cost is spread over more units, so the labour cost per unit falls. Lower unit cost means the firm can either earn a higher profit per item or cut prices to compete. This is why governments and firms care about productivity: it is central to competitiveness and to keeping costs down.

Trade-offs

Raising productivity usually has a cost: training and new machinery require investment, and pushing workers too hard can harm quality and morale. A good business raises productivity without sacrificing quality or motivation.

Examples in context

Example 1. Automation in an electronics plant. A Singapore electronics factory installs robotic assembly arms. Each worker now oversees machines that produce far more than hand assembly did, so output per worker jumps and the cost per unit falls. The firm can price more competitively against overseas rivals. The example shows technology raising labour productivity, the main route to lower unit costs in capital-intensive industries.

Example 2. Training in a service business. A bank trains its tellers to use a faster system and to handle more types of query. Each teller now serves more customers per hour, so productivity rises without hiring more staff, and customers wait less. The training cost is recovered through serving more customers with the same team, showing that productivity gains apply to services as well as manufacturing.

Try this

Q1. State the formula for labour productivity. [2 marks]

• Cue. Labour productivity = total output divided by the number of workers, giving output per worker over a period of time.

Q2. A team of 8 workers produces 2,400 units a week. Calculate the labour productivity. [2 marks]

• Cue. $\frac{2{,}400}{8} = 300$ units per worker per week.

Q3. Explain why an increase in productivity reduces a firm's unit costs. [4 marks]

• Cue. When each worker produces more, the same total labour cost is shared across a larger number of units, so the labour cost per unit falls. Because labour is a major cost, this lowers the overall cost of making each item, allowing the firm either to charge a lower price and win more customers or to keep its price and earn a higher profit per unit, both of which improve competitiveness.