PRODUCTION AND PRODUCTIVITY

7.1. Production and the Standard of Living

Most of us live better today than our parents and grandparents did when they were our age. And few countries in the world can boast a higher liv­ing standard. A nation's standard of living is measured by the amount of goods and services available to its citizens. One way to calculate a liv­ing standard is to divide total pro­duction (the gross domestic product) by the population (Production -Population = per capita GDP). When production is increasing faster than the population, more goods and ser­vices are available per person, and living standards are improving. If the population grows at a faster rate than production, average living stand­ards fall.

To increase production, people must ask and answer two questions:

• Are resources being fully employed? In other words, are factories and machines being fully used, and can those looking for work find jobs?

• If resources are fully employed, how can produc­tion be increased? If the answer to the first question is "no," restoring full employment will increase production. Chapters 10 and 12 describe some ways the U.S. government has tried to maintain full employment.

The second question is about productivity. Produc­tivity is a measure of how efficiently resources are being used. When more or better products are made with the same resources, productivity is increased.

7.2. What Is Productivity?

To measure productivity, economists find the output (amount of goods and services produced) for every unit of input. Input can be any resource that goes into the production process - acres of land, gallons of fuel, expenditures for machinery. However, produc­tivity is usually measured in terms of output per labor hour.

Ruff Manufacturing, Inc. and Ride-M Bicycle Company produce bikes of similar type and quality. Ruff Manufacturing has 5 employees, each working a 40-hour week. The company produces 200 bicy­cles a week. Productivity at the Ruff Manufacturing plant is 1 bicycle per hour: The 5 employees work a total of 200 hours (5 x 40 = 200). They average one bike per hour because 200 bicycles divided by 200 hours = 1 bicycle per hour.

Ride-M Bicycle Company employs 10 workers, each working a 40-hour week. The company produces 600 bicycles a week. Worker productivity is 1.5 bicycles per hour: The 10 workers put in a total of 400 hours (10 x 40 = 400), and 600 bicycles divid­ed by 400 hours = 1.5 bicycles per hour.

Ride-M produces more bikes and has a higher level of productivity than Ruff.

The Ride-M Bicycle Company may be able to sell its bikes at lower prices because it is more efficient. Everyone benefits from improved efficiency; in fact, improving produc­tivity-making more efficient use of resources - on farms, in factories, and in all other businesses is the only way to improve a nation's standard of living.

When productivity increases, more goods and ser­vices are available from the same level of inputs. When productivity declines, the opposite is true. If productivity increases at a rate of 2.5 percent each year, people can expect their real wages-and standard of living-to double every 28 years, or once a gen­eration. On the other hand, a .5 percent growth rate will only allow you to have a standard of living 15 per­cent better than your parents.

What Determines Productivity? A nation's pro­ductivity is directly affected by:

• the quality of its labor force,

• the quantity and quality of its machinery and other capital equipment,

• how efficiently resources are used, and

• business conditions.

The Quality of the Labor Force. Worker educa­tion and training impact productivity. Well-educated and skilled workers perform more efficiently than those who are not. Labor productivity can be increased by these factors:

• Improving the quality of education and training

programs;

• Increasing opportunities for people to receive education and training that suits their needs.

Workers' enthusiasm for their jobs also contributes to their productivity. Those who like their jobs and gain dignity and respect from their work will pro­duce more than those who lack motivation to do their best.

Proper education, job training, and positive working conditions lead to improved productivity, which directly impacts the cost of goods and services and the standard of living in a nation.

The Quantity and Quality of Machinery and Capital Equipment. Improving machinery is often said to be the best way to increase productivity. Throughout history new technologies - changes resulting from the use of new machinery and methods—have increased pro­ductivity. The examples are endless, from the devel­opment of better plows in the Middle Ages to the invention of complex computer-operated robots in the 20th century. Machines have enabled people to work faster, for longer periods of time, with fewer mistakes, and with less fatigue.

In general, businesses with the most advanced tech­nologies are also the most productive. But machines

by themselves do not necessarily improve productiv­ity. The workers who operate machines must be properly trained, and managers must organize an efficient production process.

Using Resources Efficiently. The factors of pro­duction can be combined in many ways. When they are combined efficiently, productivity will be high. When they are combined inefficiently, productivity will be low. Management must decide how to com­bine the factors of production.

In the production process, for example, it is manage­ment's responsibility to acquire the necessary capi­tal (machinery, tools and equipment). Similarly, management must hire and train the firm's employ­ees and motivate them to do the job. In other words, managers must employ both capital and labor to maximize productivity.

• Division of labor. How do managers achieve this goal? Over the years entrepreneurs and managers have developed production strategies that improve efficiency. One basic strategy that has been used and adapted is division of labor- the practice of breaking down large, complex tasks into a series of small ones so that each worker can become an expert in his or her particular task.

The importance of division of labor has been understood for many years. In a famous passage from The Wealth of Nations, Adam Smith de­scribed how pins were produced more efficiently when labor was divided.

"One worker draws out the wire, another straight­ens it, a third cuts it, a fourth points it, and a fifth prepares it to receive the head. Making the head requires two or three operations, and putting it on the pin is yet another job. Even the placement of the pins in the paper from which they are sold is a job in itself.

I have seen a small factory of this kind in which only 10 men were employed. Small as it was, how­ever, the 10 men could produce as many as 48,000 pins a day. But, if they had worked separately out­side of the factory, no one of them could have made as many as 20 pins-perhaps not even one pin."

Henry Ford took the concept of division of labor a step further. He introduced a new way to manu­facture his Model Т Ford back in 1913. Before then workers and their tools moved from station to station to complete their tasks in building each automobile. One slow worker slowed everyone else. Ford introduced an assembly line that brought the car to the worker on a conveyor belt. As a result, each worker had to finish before the car passed the work station. If a worker could not finish in time, the task was modified or the work­er was retrained.

Ford's assembly line concept created mass pro­duced products of uniform quality. Today, society continues to demand the quantity of goods assembly lines can produce-but with variety. Improved technology now allows flexible "batch production" that combines the efficiency of assembly lines and the flexibility and quality of smaller, custom operations.

• A Specialization. The pin factory Adam Smith described also demonstrates the advantages of specialization. Specialization refers to the pro­duction of a limited variety of items by a business, region or country. Just as Smith's factory special­ized in pins, "Silicon Valley" in California special­izes in microchips, and Singapore specializes in shipbuilding.

By narrowing the focus of their pro­duction, businesses, regions, and nations become expert at what they do-and reduce costs. Since everyone lives better when costs are low, specialization raises living standards. However, specialization also makes us more dependent on one another for what we need. Chapter 13 addresses such interde­pendence among nations.

• Employee participation. Another way to

increase productivity is to let workers help design and improve the production process. Employees closest to a production process often have the best ideas for improving it and making it more effi­cient. By listening to its employees, a business can discover new cost-saving techniques, show respect for its workers, and increase productivity. Profit sharing and stock ownership I also motivate1 workers. It has been found that workers with a stake in the firm's welfare work smarter-more efficiently - because they get part of the profits when productivity increases.

Business Conditions. At times business conditions are good; sometimes they are poor. These periodic ups and downs in the economy, known as the business cycle (see Chapter 12), affect productivity. When the economy slows down, sales decline. Retail stores will reduce the size of their inventories and postpone adding lines of merchan­dise. And wholesalers and manufacturers will reduce their inventories and production levels to cut costs. Although business firms can reduce the size of their inventories and production levels, they often are reluctant to lay off workers. Some fear that if busi­ness suddenly improved, they might be unable to replace their experienced staff. Others may be con­cerned about the impact of a layoff on their employ­ees and their families. And union restrictions may even prevent employers from laying off workers as quickly as they might prefer.

Whatever the reason, keeping workers longer than business conditions call for means reduced output per worker or a decline in productivity. Still, when times are good, the opposite occurs. Employers are able to hire the optimum (best) number of workers, and productivity increases.

Date: 2015-02-16; view: 985