Productivity and efficiency AS Economics and Business Unit 2b By Mrs Hilton for revisionstation

Lesson Objectives To be able to discuss the amount of capital and labour intensity used in a business To be able to discuss the implications of under and over utilisation of capacity To be able to identify ways of improving capacity utilisation. To be able to answer a past paper question based on the topic

Starter Discussion. What is your opinion? If you are tired and fed up would you say your productivity when completing any work / school task would be: 100% 75% 50% 25%

Capital intensive Some businesses depend on capital investment in plant, premises, machinery to operate. Example is an oil Refinery Production output has to be spread over very high fixed costs

Labour intensive Some businesses rely on employees more than any other factor to produce the items. Examples are sewing and farming. Many service sector businesses are labour intensive Production output spread over lower fixed costs

Capacity Capacity is the maximum possible output of a business Old Trafford the football ground of Manchester United has a maximum capacity of 75,731 people Capacity Under-utilisation would mean that not all the tickets had been sold for a match Capacity Over-utilisation would mean they had sold too many and some fans would not have anywhere to sit

capacity utilisation The amount a business can produce depends on; buildings, employees, raw materials, equipment etc Capacity utilisation is important as it has a bearing on average cost per unit and therefore EOS (Economies of scale) – In High Capacity utilisation the fixed costs are spread over more units of production – In low capacity utilisation the fixed costs can be too high to stay in business or keep producing that product

How to improve capacity utilisation Increase demand for the product through price cut or promotion (orange Wednesdays) Cut capacity – sell off parts of the factory or close down production on some lines

Productivity How efficient a firm is Labour productivity is the amount a worker produces – Measurements will be different depending on the industry. In a bakery possibly number of cakes made, in a pottery number of pots produced. – Measurement may be hard to quantify – on larger projects e.g. building a helicopter takes a long time and teams of engineers and specialists working together How productive is this employee?

Productivity and efficiency Firms that have a higher output per employee are more efficient This can lead to competitive advantage as prices per item made are lower than competition – Can become market leader through low prices or – Enjoy high profits due to lower production costs Quality may suffer as a result of trying to produce items too quickly

Ways to improve productivity TQM approach – Total quality management Lean production – reduction in wastage JIT – just in time delivery system Cell production – reorganisation of manufacturing layout Improve employee motivation through financial incentives; bonus, piece rate, profit share

Sample question 1 [4]

Answer question 1 Correct answer is B It is a key measure of business efficiency/productivity (1 mark) It can be used to compare performance between countries and/or companies and/or time periods (1 mark) Numerical example: 500 t shirts / 50 employees = 10 t shirts per day (1 mark) Up to two of the marks above can be achieved alternatively by explaining distracters, e.g. A is wrong because this measure how long each employee works rather than the output per worker (1 mark) C is wrong because skills and knowledge of the workforce are likely to affect the quality of output rather than the output itself. (1 mark) D is wrong because the motivation of the workforce can improve labour productivity because they are happier (1 mark) Any acceptable answer which shows selective knowledge/understanding/application and/or development NB up to 2 marks out of 3 may be gained for part (b) if part (a) is incorrect

Sample question 2

Answer question 2

Revision Video