Chapter 9

Production andProductivity

How do we measure oureconomy?

• GDP– Gross Domestic Product

• The market value of all goods and services producedin a nation’s economy during a given time.

• Considered the best measure of the size of oureconomy.

What’s Wrong with GDP?• Measures Size, but not accurately.• Takes into account goods & services sold.• Doesn’t take into account services you and I

do within our households:• Providing child care• Preparing meals• Changing our own oil or maintenance of our car• Our own yard work; etc.

What’s Wrong with GDP?• What about our leisure time?• What about the illegal sale of drugs and

other items sold in the “undergroundeconomy”.

• What about increased production after anatural disaster - 9/11; Hurricanes;Earthquakes (What do we do in response to that?)

What’s Wrong with GDP?• The growth from year to year is measured

inaccurately. WHY?– GDP doesn’t take INFLATION into

consideration.

INFLATION• Inflation is a period of rising prices when

the purchasing power of the dollar is falling.

– Can be characterized as “too many dollarschasing around too few goods”.

REAL GDP• Economists have come up with a way to

adjust the numbers to remove the effects ofinflation.

• Dividing real GDP by a country’s totalpopulation yields per capita real GDP.– Good overall indicator of a nation’s standard of

living

We’ve talked Production . . .What about PRODUCTIVITY?

• Productivity is the output of goods andservices as measured per unit of input -time, workers, capital resources, etc.

• Labor Productivity is the amount the workforce can produce in a given time.

What makes productivityimprove over the years?

• Changes in the quality of human resources.• Changes in management.• Increases in the quantity and quality of

capital resources.• Technological change.

The Quality of Human Resources• What is the education level of the workforce?• What is the skill level of the workforce?• What is the prominent attitude of the work force?• Education has played a critical role in the U.S.

economies shift from goods-producing industriesto service and technology industries

The Quality of Management• Who are our leaders?• Innovative ideas?• Motivational Strategies?

– TQM - Emphasis on things like:• Customer Satisfaction• High-Quality Workmanship• Employee Involvement• Shared Vision

The Quantity & Quality ofCapital Resources

• What are we using to produce our goodsand services in today’s world?

• Has it made it easier and more efficient?• Take a simple haircut as an example.• How about the production of a vehicle?

Technological Change• Think about Technology in Terms of Supply when

we studied SUPPLY and DEMAND.• What did innovations in technology do to the

SUPPLY curve?• Think about what computers have done for our

society and our economy.• Think about you how much more efficient it is for

you to use the internet and a computer to create areport as opposed to your parents who had to goto the library and use a typewriter.

Why Costs Change asProduction Changes

• Good managers are always looking for waysto make products more efficiently. Whatare the PRODUCTION COSTS?

Total Costs of Production• FIXED COSTS are those costs that remain the

same regardless of how much a firm does.OVERHEAD COSTS is another name.

– Examples: depreciation, real estate taxes, managers’ salaries,interest on loans, etc.

• VARIABLE COSTS are those costs that increaseas the number of units produced increases.

– Examples: Hourly wages, electric power, raw materials, etc.

The Law of Diminishing Returns• Says that as more variable resources are

added to a fixed amount of other resourcesin an effort to expand production, at somepoint the amount produced eventuallydiminishes.– Farmer Ted example:

• Fixed (Tractor and Wagon)• Variable (# of hired hands)

Marginal Cost - Marginal Benefit• As long as marginal revenue exceeds

marginal cost, profits go up when thecompany expands

• But each time production goes up, marginalrevenue falls and marginal cost rises

• Therefore, at some point marginal cost willrise above marginal revenue - stopexpanding

Economies of Scale• Reductions in cost resulting from large-

scale production.– How large a company must be before it pays

varies from case to case– Involves mass production techniques such as

division of labor and use of complex equipment