In economics, productivity is the amount of output made per unit of input applied. In simpler terms, productivity is the calculation of output per labor hour. Productivity covers many different aspects of a business because of the variables used to determine the efficiency of production. Average and marginal productivity are analytical tools used to measure the output of labor in order to evaluate current production ability and improve future capacity.
Average productivity is the total production involved in a process divided by the number of variable unit inputs employed. It is what each employee produces. If there are 100 employees producing 500 units per day, the average product of variable labor input are 50 units per day. If average productivity is more than marginal productivity, average productivity will decrease. If the average productivity is less than marginal productivity, average productivity will increase.
Marginal productivity is the increase in the rate of output created by adding one more unit of the input while maintaining the same constant inputs. For example, marginal productivity could measure the increase of output by adding one more worker. With marginal productivity, the higher the productivity of a unit or worker of production, the higher the resulting income.
You can measure productivity by the rate of efficiency in which a manufacturer makes products and services. Productivity is, therefore, a way to compare the cost of an item to its benefit. If you have an input of two and output of two, your productivity is lower than if you have an input of two and an output of four. Productivity is a very broad concept used for business and economic analysis. Many factors contribute to the increase of efficiency. However, a business should weigh the efficiency against the expenditure that resulted in the increased productivity. Generally, if cost of efficiency is the same as the productivity you have not achieved efficiency.
Output is the number of goods or services made. If a business makes the right product with demand that meets the customers’ needs, high output will benefit the business. On the other hand, producing a product that does not meet quality standards and does not meet the demands of the customer is not efficient regardless of the output. Productivity has to take into account many factors before a business should consider it efficient. A business must consider everyone and everything involved in the output as part of the analysis for a full and accurate assessment.
- "Principles of Economics"; N. Gregory Mankiw; 2008