IGCSE Economics 0455 – Microeconomic Decision‑Makers: Firms and Production
Microeconomic Decision‑Makers – Firms and Production
Objective: Influences on Production and Productivity
1. Key Concepts
In economics, a firm’s production is the process of turning inputs (factors of production) into outputs (goods or services). The amount of output produced per unit of input is called productivity.
2. The Production Function
The relationship between output and inputs can be expressed as a production function:
\$Q = f(L, K, T)\$
where:
\$Q\$ = quantity of output
\$L\$ = labour input
\$K\$ = capital input (machinery, buildings, etc.)
\$T\$ = technology and other factors (entrepreneurship, management, etc.)
3. Influences on Production
Several factors affect the level of output a firm can produce:
Technology – advances that allow more efficient production.
Labour – quantity, skill level, motivation, and health of workers.
Physical Capital – quality and quantity of machinery, tools, and infrastructure.
Entrepreneurship – ability to combine inputs creatively and take risks.
Management & Organisation – planning, coordination, and control of production processes.
Scale of Operations – economies or diseconomies of scale that affect average costs.
Government Policy – taxes, subsidies, regulations, and trade policies.
External Environment – availability of raw materials, market demand, and competition.
4. Measuring Productivity
Productivity is usually measured as output per unit of input. Common measures include:
Labour productivity: \$\displaystyle \frac{Q}{L}\$ (output per worker or per hour worked).
Capital productivity: \$\displaystyle \frac{Q}{K}\$ (output per unit of capital).
Total factor productivity (TFP): the portion of output growth not explained by increases in labour or capital alone.
5. Influences on Productivity
Factors that raise productivity are similar to those that raise production, but the focus is on efficiency rather than sheer volume.
Influence
How It Affects Productivity
Human Capital Development
Training, education and health improve workers’ skills and efficiency.
Physical Capital Investment
Modern, well‑maintained machinery reduces time and waste.
Technological Innovation
Automation and improved processes increase output per input.
Management Techniques
Better planning, scheduling and quality control reduce idle time.
Economies of Scale
Large‑scale production spreads fixed costs, lowering average cost per unit.
Competitive Pressure
Firms innovate to stay ahead, driving productivity gains.
Government Incentives
Subsidies for R&D or tax breaks for capital investment encourage productivity‑enhancing activities.
6. Interaction Between Production and Productivity
Higher productivity usually leads to higher production capacity because the same inputs can generate more output. Conversely, expanding production without improving productivity can raise costs and reduce profitability.
Suggested diagram: The Production Possibility Curve (PPC) showing how improvements in technology shift the curve outward, indicating higher potential output for the same resources.
7. Summary Checklist
Identify the main inputs: labour, capital, technology, entrepreneurship.
Explain how each input influences the level of output.
Define productivity and list common measurement formulas.
Discuss how human capital, physical capital, technology, management, scale, competition and policy affect productivity.
Understand the link between productivity gains and increased production capacity.