What is Productivity

Productivity The amount of OUTPUT in a given time frame A total count of how many goods/services were produced in a given period Ex: How many haircuts did the stylists give in an hour? If she gave five, then her productivity for that hour was five Do you think producers want to produce MORE or FEWER goods/services?

Productivity More – why more? More goods/services leads to more profit If you increase productivity, you increase your profits! EX: Would the hair stylists make more money if she cut five heads of hair or ten heads of hair in an hour? Ten –

How can businesses increase Productivity Increase the factors of production EX: Currently Mel’s scrapbooking company can complete 5 scrapbooks a day using one worker, one cutting table, one pair of scissors, one glue stick, one letter machine, and one dye cut machine If we add one additional input to each category, then Mel’s scrapbook company could DOUBLE it’s productivity Remember to subtract extra costs before you can make a profit (New profit – cost of inputs = actual profit)

What if…. What if Mel’s second worker is slower cutting letters than the first worker, but the first worker is slower gluing than the second worker? Then have the worker SPECIALIZE at what their best at – worker one should do all the cutting and worker two should do all the gluing Remember skilled or knowledge workers are key to turning profits

Specialization Concentration of the productive efforts of individuals and firms on a limited number of activities Leads to more efficient use of resources Better efficiency leads to more productivity

Specialization on a broad scale When discussing production – how can specialization lead to better efficiency? Focusing on ONE product instead of TEN products would allow you to produce an abundance of the one product – instead of sharing the resources However, a producer must figure out which product would be MOST beneficial In economics, we say the person, business, or country with the LOWEST OPPORTUNITY COST should produce an item

How do we determine How do we determine who has the lowest opportunity cost? By using COMPARATIVE ADVANTAGE Comparative advantage = choosing the product that you could MOST efficiently produce and have the lowest opportunity cost But what if a person is better at producing everything compared to his neighbor? Then he would have an ABSOLUTE ADVANTAGE over his neighbor, BUT that doesn’t mean he would be better off producing everything

Scenario John and his neighbor Grant both farm their own goods – given their current resources here is what they could produce one item in a day It is clear that John has an ABSOLUTE advantage, but What are his opportunity cost for growing both goods? If John continues to swap production each day – what does he give up At this rate, Each time John produces 2 ears of corn for a day, he gives up the opportunity to grow 6 watermelons that day and vise versa to grow 6 watermelons he gives up 2 ears To calculate COMPARATIVE ADVANTAGE, divide the total output of each day – to grow each corn he gives up 3 watermelons – to grow each watermelon he gives up 1/3 a corn Which one cost him more? It costs John too many watermelons each time he produces corn, but it costs him very little corn when he does watermelon At this rate, Each time Grant produces 1 ear, he gives up the opportunity to grow 1 more watermelon, and vise versa he gives up 1 additional watermelon to produce 1 ear Comparative Advantage for Grant – 1 watermelon per corn and vise versa 1 corn per watermelon Who GAVE UP THE FEWEST products in a day Watermelons per dayEars of Corn per day John62 Grant11

So who should produce what According to the COMPARATIVE ADVANTAGE calculations – who should produce what? it costs John THREE watermelons each time he produces an ear of corn, but it only cost Grant ONE watermelon when he produces one ear of corn Clearly, Grant has a comparative advantage in growing corn b/c his opportunity cost was lower HE GAVE UP FEWER WATERMELONS Therefore, John would better off specializing in watermelons, instead of doing both – then he could trade some extra watermelons for corn

Example John now specializes in only producing watermelons and no corn Grant specializes in only producing corn and no watermelons At the end of the day John trades TWO watermelons for one corn Now Grant has Two goods instead of just one John now has FIVE goods instead of just four

Focus on the total number of goods, not what each good is Sure, Grant no longer has any corn- But all along he wanted just watermelon – now he gets two watermelons in one day ( as oppose to just one if he produced it) Of course this idea is ALL BASED on the concepts of voluntary TRADE/ EXCHANGE If he didn’t want watermelon – then he could exchange with someone else