2.3 (Productive Efficiency) Flashcards
2.3.1 What is productivity?
What is capital productivity?
+ what are the equations for productivity?
-Example of a country who is very productive & why?
measures the level of output produced from a given input
output per unit of capital
+ (Output/Input per time period)
+ (Output/Number of employees)
- USA as it is good at investing in the development of physical capital labour saving devices
What is efficiency?
(how can it be done?)
+ why is it important?
Using scarce resources in the most economically achievable way minimising costs & making most of capital labour
(via process innovation)
+ creates competitive advantage
+ important in service & manufacturing sectors e.g self-service checkouts
What are 5 factors which influence productivity?
+ what are the two main ways of increasing productivity?
1) Investment (in capital equipment)
2) Use of new technologies (usually via R&D)
3) Education & skills training (human capital)
4) Management skills
5) Infrastructure (e.g transport & communication facilities)
+ reducing inputs so there is the same level of output from less resources
+ increasing output made by same level of input
What are the possible downsides of increasing productivity?
+ examples of companies which are very productive & why?
- workers may have to work longer hours
- workers may not want to learn new skills
- workers may want a pay rise
- some workers may see changes as a threat to their jobs (low-skill jobs usually)
+ Apple, Netflix & Google are 40% more productive than the average company as they organised their businesses’ star players into critical roles rather than spreading them out evenly
What is the link between productivity & competitiveness?
+ why do firms concentrate on productivity to achieve competitiveness?
1) Using fewer resources to produce more (lean production)
2) Therefore, unit costs fall, prices can be cut & sales rise (dependent on PED)
3) Therefore, product is more competitive
4) So, profit increases
+ in order to meet demand & stay relevant to consumers
+ to be able to compete in price elastic demand markets
+ to lower overall cost per unit
+ service-focused firms can provide a better customer experience as they can respond quicker to demand, encouraging repeat sales
What is the link between productivity & wages?
- when employees manage to produce more, employers find them more valuable so wages & salaries often rise
- for productivity is increasing on a national level then GDP will increase too. Links closely with standard of living & economic growth.
What are the 2 reasons why productivity did not rise in the UK in 2008-14 despite overall positive economic growth?
1) Investment fell in 2008 (firms reluctant as demand for their products was falling as a result of weak incomes & fear of debt. ROI would likely be low increasing risk)
2) Discrepancy between sectors increasing (productivity rising faster in manufacturing sector than service sector partly due to falling productivity in financial sector. Regulations discouraged FS from taking risks meaning less lending occured).
How low is the UK’s productivity compared to similar countries?
+ what may be the reasons for this?
- how are the government planning to combat this?
1) lowest of G7 nations post-pandemic (US produced (US produced 35% more output per worker in 2019)
2) lowest of North West Europe nations (41% lower than Ireland)
+ low physical & human capital investment
+ economy’s share of capital-intense heavy industries decreased
+ poor diffusion of productivity enhancing practices
+ fragmented policy
- creating a National Wealth Fund
- driving innovation
- boosting investment
What is labour-intensive production?
+ examples of LI industries?
What is capital-intense production?
+ examples of CI industries?
LI: labour costs form a high percentage of total costs
+ hairdressing, teaching, hotels & restaurants
CI: large percentage of its total costs are tied up in the fixed costs of purchasing & operating machinery
+ car manufacturing, steel production & transport infrastructure
What are the pros & cons or labour-intensive & capital-intensive industries?
LI: + labour supply is cheap & always available
+ products may require craftsmanship or special expertise
+ business may be small w little finance available for machinery
+ more flexibility
+ generally lower BE output
- labour force can be expensive to buy
- of staff are ill production may have to stop
CI: + labour supply can be scarce or expensive
+ consistency of product (less wastage)
+ continuous production is required
- set up & installation costs are expensive
- worker motivation may be low
- less flexibility due to high sunk costs
- generally higher BE output
What is the cause of increased capital investment?
+ How are capital investment, productivity & standards of living linked?
(chain of reasoning?)
- as economies develop they become much more productive
- as labour productivity rises, wages & salaries rise
- this creates an incentive to make labour-saving investment
- technological changes make this cheaper increasing capital productivity
+ increasing capital leads to net investment, increasing standards of living
+ large capital stock is normal in a developed economy
+1) capital becomes relatively cheaper & labour relatively more expensive as wealth increases
+ 2) it is cheaper to equip workers w better tools & machines than use more labour
+3) production becomes more capital intense
+ 4) labour productivity rises & there will be an investment in human capital
How does capital investment affect businesses (chain of reasoning)?
1) new technologies are introduced
2) this leads to new processes using more capital equipment
3) this leads to productivity rises which results in falling unit costs
4) these can be passed onto consumers leading to falling prices
5) this may increase sales (PED dependent)
6) this could increase revenue & profit leading to new job creation
2.3.2 What is capacity utilisation?
What is the capacity utilisation equation?
utilised capacity?
+ what is full & spare capacity?
proportion of maximum possible output that is currently being used
current output/maximum possible output x100
+ full capacity means a business is using all of its available resources but spare capacity means they are missing out on potential output
What is under-utilised capacity?
+ what are some implications of this?
not making the most of your capacity leading to an increased cost per unit
+ more time for maintenance & repair of machinery
+ less pressure & stress for employees
+ allows company to cope w sudden spikes in demand
- higher fixed costs per unit
- may not be able to meet demand when it is high leading to excess demand & negative brand image
- workforce may be lacking in motivation
What is over-utilised capacity?
+ what are some implications of this?
when a business is trying to produce more than its capacity will allow
+ will create maximum sales leading to more profit which can be reinvested
- workload may get too intense leading to demotivation
- run risk of reducing quality
- will have problems fulfilling even higher demand
- maintenance of equipment & machinery near impossible
What are some ways to improve capacity utilisation?
- estimating long-term levels of sales
- creating more demand (e.g via promotion)
- understanding the consumer (via market research) to better organised capacity to meet demand
- selling assets to reinvest profits
- employing more/fewer staff
- extending range of products or finding new markets
What do high unemployment levels suggest about capacity & how may governments respond to this?
+ what is an example of a sector which over-utilised capacity?
that the whole economy is working well below capacity. Governments may use policy to increase demand & encourage business expansion e.g reducing interest rates.
+ airlines such as EasyJet have overbooked flights deliberately to ensure full capacity as many people don’t show up for their flights. However, this has created a negative brand image.
2.3.3 What is quality control?
+ what are some advantages & disadvantages of this method?
involves checking finished products for any sign of defect or poor error
- workers focus on producing as many units as possible
- inspectors check the output meets minimum acceptable standards
+ could guarantee no defects leave the factory
+ requires little staff training
- faulty products may slip through the cracks
- may stop staff producing the best quality product
What is quality assurance?
+ what are some advantages & disadvantages of this method?
involves designing the production process so as to eliminate waste & ensure defects do not happen
- governing quality at every stage of production
- companies have to put a documented system in place
+ may reassure customers of quality
- does not promise a high quality product
- may encourage complacency
What is Total Quality Management (TQM)?
+ what are some advantages & disadvantages of this method?
places the emphasis on meeting customer requirements & continuous improvement in all aspects of the business:
- requires commitment from everyone
- about building-in not inspecting out
- requires teamwork, organisation, communication & customer focus
+ quality should show through whole process
+ encourages innovation
+ makes the business adaptable
+ motivates staff for better quality which could lead to competitive advantage
- may lack clarity & not be valued by staff
- may be expensive due to training costs
Why is TQM important for a business?
+ in customer choice and competitiveness
+ reputation for quality brings marketing advantages:
- generates a high level of repeat purchase lengthening product life cycle
- allows brand-building and cross-marketing
- allows a price premium
What are 2 other quality initiatives?
1) Quality Circles: group of employees who meet together regularly for the purpose of identifying problems & recommending adjustments to the process
- can boost staff morale
2) Zero Defects: aims to produce goods and services with no faults
- may be unrealistic for some but serious for others
What is kaizen & how does it work?
(example of a company who us this method?)
+ advantages & disadvantages of this method?
Japanese term for continuous improvement, finding new & better ways of organizing production & designing products:
- team effort (encouraged to all employees)
- improvements are based on people’s ideas rather than investment
- each change may be little, but they add up
- based on belief that the worker knows best
- about finding ways to save time, energy & resources
(Created by Toyota)
+ empowers workers improving quality & productivity
+ employees will feel more valued
+ can create a foundation for innovation
- may be expensive & take a long time
What are the 7 types of waste?
1) over-production
2) waiting
3) transportation
4) underutilisation of employees
5) inventory
6) motion
7) defects
