Productivity has always been considered as an important determinant of standard of living. This factor, along with entrepreneurial success, determines the standard of living that people are able to enjoy. It has always been considered important to economic growth. One cannot ignore the fact that productivity is the key to increase profitability.
Productivity per se is not something that is easy to measure. Nevertheless, it is considered a crucial determinant of a country’s standard of living. Productivity is basically the efficiency at which a country or business can convert resources into products, potentially earning more from fewer from less labor hoarding. Productivity is often used as the yardstick for measuring performance in many businesses. In addition, productivity is also used in determining the amount of taxes that need to be levied on companies and individuals.
Companies’ productivity is often determined through the production function decomposition
This analysis attempts to identify how much output can be produced from available inputs if an ideal production function is applied. Production function refers to the number of factors that determine how much of an output can be produced from the available inputs. A production function analysis may be used to identify inputs that are not needed in order to create the desired level of output and non-ideal inputs that are not required to complete a particular activity.
Productivity is also affected by the extent of physical capital
Physical capital refers to the fixed assets such as capital equipment and real estate that a firm needs in order to produce its outputs. Economic theory suggests that firms should maximize the use of physical capital, since this can be the means of creating employment and income. On the other hand, firms may not necessarily employ all of their physical capital in order to produce goods and services. Therefore, changes in the availability of physical capital can affect productivity.
A key factor that affects productivity is the business cycle
The business cycle describes the sequence of events that affect a firm’s production and consumption process. Long-term prosperity is largely determined by the state of the business cycle. When the state of the business cycle is favorable, then the firm has a better chance of experiencing higher productivity. Conversely, when the state of the business cycle is unfavorable, then the likelihood of experiencing lower productivity is more likely.
In addition, research has suggested that the size and quality of the inputs into the production process are important determinants of productivity. Researchers have theorized that firms with greater input and technological sophistication experience higher levels of productivity than those with smaller input and less technological sophistication. In addition, productivity is also related to the extent of competition and the extent to which firms can customize products to meet customer requirements. Thus, technological change and the ability to respond to technological change are important factors that affect productivity.
Productivity can also be affected by external factors
External factors refer to those beyond the control of the firm. They include effects of weather, transport, infrastructure, taxes and other governmental interventions. The extent to which these factors hamper the productivity of the production process is known as external barriers. They tend to reduce productivity in the short run because they prevent the efficient allocation of inputs and they lead to excess costs, delaying production and raising prices.
To conclude, overall economic efficiency depends on three primary factors: productivity, capital, and effort. Other important factors are prices, flexibility, technology and skills. These three factors are interdependent and interconnected. A firm must take into account all the factors that are important to achieve its objectives and attain its goals of success in order to achieve economic efficiency.