1. AS: 3.1.3 Production, costs and revenue
1.3.1 Production and productivity
What are the factor inputs?
What is the final output?
Why is production being brought home?
AS: Production, costs and revenue
Y1: Production, costs and revenue

2. 1.3.1 Production and productivity
Production converts inputs, or the services of factors of production such as capital and labour, into final output
The meaning of productivity, including labour productivity

3. Total factor productivity is the output of all factors of production.
Production is the conversion of factor inputs i.e. land, labour, capital and enterprise into final output
Most production is likely to make use of all factor inputs in producing goods or services
Productivity can take different forms:
Labour productivity is output per worker:
Total output/no. of workers
Capital productivity is output per unit of capital e.g. machine
Factor productivity is average output of all factors of production
Total factor productivity is the output of all factors of production.

4. Productive efficiency
Productive efficiency occurs when an economy uses the minimum inputs to produce the maximum output at lowest cost.
Productive efficiency occurs where no additional (or maximum) output can be produced from the factor inputs available at the lowest possible average or unit cost
Average total cost = total cost/output
This can be shown using an average total cost diagram
Productive efficiency in the UK or not!
What is the UK productivity puzzle?

5. Productive efficiency
Productive efficiency can be shown using an average cost curve diagram
Average total cost (ATC) is total cost divided by output.
As output increases costs per unit fall. This occurs because fixed costs (those costs that do not vary with output e.g. rent) are spread over the higher output.
Productive efficiency occurs at output Q where average total costs are at their minimum.
Costs of production
Average Total Cost Q
Output

6. Productive efficiency
Good Y
Good X A B D C
Recap
What is meant by the term opportunity cost?
Label the diagram to show the opportunity cost of moving from point A to point B.
Any point on the PPF is said to be productively efficient e.g. point A or point B. On the curve we are producing at maximum production i.e. we cannot produce any more. At point C we can produce more goods (under production). Point D is unobtainable given our current factor inputs.
The PPC also shows the trade-off between two variables, here good X and good Y. There is an opportunity cost as producing more of good X means producing less of good Y.

7. Economic agents can improve resource allocation
Economies of scale occur as unit costs fall as the scale of production increases.
The decisions of individuals, producers and government can, under certain circumstances, improve resource allocation
Through economies of scale we can see that productive efficiency is created when:
Purchasing economies lead to a reduction in costs
Specialisation can lead to a more efficient use of inputs
Better management can lead to increased output with the same factor inputs

8. Economic agents can create resource misallocation
Diseconomies of scale occur as unit costs rise as the scale of production increases.
Bureaucracy occurs when large organisations, particularly government, have overly complex administrative procedures. This increases costs.
The decisions of individuals, producers and government can lead to a misallocation of resources
Through diseconomies of scale we can see that productive inefficiency is created where resources are misallocated:
Lack of communication between employees
Lack of coordination by management
Bureaucracy, particularly in large organisations

9. Test yourself What is meant by the term production?
What is meant by the term productivity?
Briefly explain the role of labour in production.
With the use of appropriate diagrams explain the term productive efficiency.