In microeconomics, productivity is a measurement of the quantity and quality of output produced by a firm, given a fixed level of labor and capital. Measuring productivity is relatively straightforward, but showing the impact of an increase in productivity on a graphical basis is difficult using standard measurements. Instead, economists use a theoretical concepts called the production-possibility frontier, which shows how productivity increases upon labor training or a change in technology.
Economists define productivity as maximizing a company's input to produce output. Input may include machinery, labor or raw and intermediate materials. Output is what the company produces and sells. In terms of management, companies manage productivity on three levels. Managers on the top level are responsible for the time management of the company by researching and adopting newer production techniques. Mid-level managers are responsible for planning increases in productivity, and low-level managers carry out increases in productivity by working alongside employees engaged in the production process.
Analysts use productivity to measure a firm's use of technology, efficiency and cost savings. An upgrade to more modern production techniques with the use of new technology can lead to efficiency. With a more efficient means of production, a firm can save on costs. The use of technology is not the only method in increasing productivity, as a well-trained workforce can increase the rate of production as well. Thus, analysts have many ways in measuring productivity, and focus on labor -- or the workforce -- and capital, which is the machinery and buildings used in the production process. Often, analysts measure labor productivity and capital productivity in terms of gross output -- or the amount of output produced -- or value added, which is a measure of quality. When economists graph productivity, however, they use neither of these measures. Instead, they use a theoretical concept known as the production-possibility frontier.
The production-possibility frontier is a concept in microeconomics that graphs the production levels of a company. The analysis assumes that the company produces two types of output. Furthermore, the factors of production, composed of labor and capital, remain fixed. When you graph the units of one type of good on the x-axis and the units of another type of good on the y-axis, you can draw a curved line that is concave toward the graph's origin. So, take for example a firm that produces televisions and radios. The firm can produce 100 televisions, but no radios, as the firm has to devote all of its labor and capital to the production of televisions. However, the firm may produce 99 televisions and one radio, or 50 televisions and 50 radios. Any point that lies inside the curve is an inefficient level of production, and any point that lies outside the curve is impossible with the current factors of production. Only points that lie on the curve represent the most efficient level of production with the current levels of capital and labor.
Manipulating the Production-Possibility Frontier
Consider now that the company in the example plans to upgrade all of its machinery. The new machinery can produce 120 televisions and radios a day, while the old machinery could only produce 100. This is an upgrade in capital. The production-possibility frontier then shifts outward. Some points that lay outside the old production-possibility curve are now attainable. Next, the firm implements a new policy on employee training. The firm retrains all employees, old and new, and teaches them how to increase their daily output. This is an increase in labor productivity, which has the same effect on the production-possibility frontier. Dragging the curve inwards results in less output.
- Jupiterimages/Creatas/Getty Images