Productivity
Read this chapter, which explores the beneficiaries of, affecting factors, measurement of, and technological advances associated with productivity.
Measuring Productivity
Productivity is represented by production functions, and is the amount of output that can be generated from a set of inputs.
Learning Objectives
- Discuss different ways to measure productivity and productivity growth
Key Takeaways
Key Points
- From an economic standpoint, the production function demonstrates the tangible output created as a result of a production process including all tangible inputs.
- The objective in employing this perspective is to pursue allocative efficiency within the process (as opposed to technical or logistical efficiency, as engineers or supply chain managers may be pursuing).
- Generally speaking, the factors of production include land, labor and capital.
- There are a variety of ways to approach the measuring of productivity in the context of production functions, including the functional form, the linear form, the Cobb-Douglas production Function and the Leontief Production Function.
Key Terms
- Allocative efficiency: A type of economic efficiency in which economy/producers produce only those types of goods and services that are more desirable in the society and also in high demand.
- Liquid assets: An asset in the form of money or cash in hand, or an asset which can be quickly converted into cash without losing much value.
Production Function
From an economic standpoint, the production function demonstrates the tangible output created as a result of a production process including all tangible inputs. The objective in employing this perspective is to pursue allocative efficiency within the process (as opposed to technical or logistical efficiency, as engineers or supply chain managers may be pursuing). This means that the production function identifies optimal inputs (and consequent outputs) to satisfy the needs of a given population via a particular production process. While different economic perspectives often identify different factors of production (i.e. inputs in the system), it is useful to identify the following:
- Land/Natural Resources: Products of nature that have economic value, including metals/agriculture/livestock/land/etc.
- Capital: This is a broad term, capturing more than just financing and investment. Capital can also be fixed capital (i.e. machinery, equipment, buildings, computers, etc.) or working capital (i.e. goods, inventory and liquid assets). Concepts of human, intellectual and social capital is also highlighted, separate from the concept of labor below, which can affect the efficiency of a process.
- Labor: The human skills, time and efforts necessary to add value to the production process. This can range from highly tangible inputs (working hours, products assembled) to highly intangible inputs (entrepreneurship, experience, technology skills, etc.).
Product Function: This graph illustrates the way in
which a production function identifies the relationship between a
quantity of inputs and the resulting output of a given product. This
takes into account marginal and average product, which are indicative of
the change in efficiency based upon inputs.
Forms of the Production Function
-
Functional Form: One way a production function can be illustrated is through the following equation
. In this circumstance '
' is the quantity of output while each '
' is a factor input
-
Linear Form: While this is generally not practical in practice, it is also possible to represent this in a linear mathematical fashion if parameters (
,
,
, and
below) are identified:
-
Cobb-Douglas Production Function: One of the most useful frameworks, that allow for a technological relationship to be illustrated between the amount of two (or more) inputs is the Cobb-Douglas model. This is most often used to illustrate how physical capital and labor effect one ano ther (see ). In the equation, '
' is total production while '
' is labor, '
' is capital, '
' is total factor productivity and the alpha and beta are the elasticity he two inputs.
- Leontief Production Function: The Leontief Production Function assumes a technologically pre-determined set of proportions for the factors of production (i.e. no ability to substitute between factors. This is specifically designed to capture minimums or limiting cases of production. The '
's in the equation are inputs of specific goods while the
and
represent the technological determined constants and '
' being the overall output:
Cobb-Douglas Production Function: This is an
illustration of a two-input Cobb-Douglas Production Function, where the
ability to benchmark an output in comparison to two separate quantities
of inputs is feasible.