Cambridge Notes, Past Papers, Revision Questions

Microeconomic Decision‑Makers – Firms and Production

Cambridge IGCSE Economics 0455 – Microeconomic Decision‑Makers

Topic: Firms and Production

Objective: Understand the difference between Production and Productivity

Production refers to the total quantity of goods or services that a firm creates in a given period of time. It is measured in physical units (e.g., tonnes of wheat, number of shirts, megawatt‑hours of electricity). Production is a stock concept – it tells us “how much” has been produced.

Productivity measures the efficiency with which inputs are turned into output. It is a rate concept – it tells us “how much output per unit of input”. Higher productivity means the same amount of input yields more output, or the same output can be produced with fewer inputs.

Key Concepts and Formulas

Total Product (TP) – the total output produced from a given amount of input.

Average Product (AP) – output per unit of a particular input.
\$AP = \frac{TP}{\text{Quantity of Input}}\$

Marginal Product (MP) – the additional output generated by one more unit of input.
\$MP = \Delta TP / \Delta \text{Input}\$

Labour Productivity – output per worker or per hour of labour.
\$\text{Labour Productivity} = \frac{TP}{\text{Labour Hours}}\$

Capital Productivity – output per unit of capital equipment.
\$\text{Capital Productivity} = \frac{TP}{\text{Capital Stock}}\$

Comparing Production and Productivity

Aspect	Production	Productivity
Definition	Total quantity of output produced.	Output per unit of input (efficiency).
Measurement	Physical units (e.g., units, tonnes, litres).	Ratio (e.g., units per worker, \$TP/L\$).
Focus	Scale of operation.	How effectively resources are used.
Implication for Costs	Higher production can raise total cost.	Higher productivity lowers average cost.
Typical Indicator	Total Product (TP).	Average Product (AP) or Marginal Product (MP).

Why the Distinction Matters for Firms

Decision‑making: Managers must decide whether to expand output (production) or improve processes (productivity).

Cost control: Raising productivity reduces average costs, enhancing competitiveness.

Growth strategies: Sustainable growth relies on both higher production and continuous productivity gains.

Performance evaluation: Productivity provides a clearer picture of managerial efficiency than raw production figures.

Suggested diagram: A production function curve showing Total Product (TP) against Labour input, with points illustrating Average Product (AP) and Marginal Product (MP).

Sample Calculation

Suppose a factory produces 5,000 units of product using 250 labour hours.

Labour productivity is calculated as:

\$\text{Labour Productivity} = \frac{5{,}000\ \text{units}}{250\ \text{hours}} = 20\ \text{units per hour}\$

If the firm introduces a new machine and output rises to 6,000 units while labour hours remain at 250, the new productivity becomes:

\$\text{New Labour Productivity} = \frac{6{,}000}{250} = 24\ \text{units per hour}\$

This illustrates that productivity can increase even if the total amount of labour used does not change.

Key Take‑aways

Production = total output; productivity = output per unit of input.

Higher production does not automatically mean higher productivity.

Improving productivity is essential for reducing average costs and enhancing profitability.

Both concepts are central to a firm’s short‑run and long‑run decision‑making.

The difference between production and productivity