Takes into consideration
all factor inputs (factors
of production) - labour,
capital, land and natural
resources and enterprise
Efficiency is defined as:
Output (production) is
maximized from a given
level of inputs
BENEFITS OF HIGH
LABOUR
PRODUCTIVITY
Efficient use of inputs allows businesses to maximize
production and therefor satisfy the needs of more customers
Efficient use of inputs means that fewer inputs are needed to
produce a given level of output.
This reduces unit
costs for the business
Lower unit costs enable a business to gain a competitive
advantage because a business can lower its prices and yet still
maintain the same profit margin
Where consumers desire high quality, the cost savings from
greater efficiency can be used to improve the quality of the
product
By comparing its labour productivity with its level of efficiency,
a business can recognize whether it should modify the balance
of its inputs in order to improve overall efficiency.
E.g.
If the business has high labour productivity and
low efficiency, this suggests that it can improve its
efficiency by increasing its labour force and
reducing the use of other inputs, such as capital.
Similarly, if there is low labour productivity and
high efficiency, this suggests that labour should be
replaced by other inputs in order to improve
overall efficiency.
High labour productivity and efficiency can also enable the
business to increase its appeal to its stakeholders. Greater
efficiency may allow the business to:
Pay higher wages to its
workers
Offer lower prices or
improve quality for
consumers
Spend more money on the
local environment
Increase overall profits for
its shareholders
HOW TO INCREASE
EFFICIENCY AND
LABOUR PRODUCTIVITY
Improving the fertility of land
Using renewable or recyclable resources
Greater education and training of the
workforce
Increasing the level of investment in
capital equipment
Improvements in management skills
and a willingness to take risks by
businesses
Combining the factors of production
in a balanced way
Extending the overall scale of
production
As a business grows larger it
tends to improve both labour
productivity and efficiency. The
benefits that lead to these
improvements are known as
ECONOMIES OF SCALE
ECONOMIES OF SCALE
Fixed costs, such as the depreciation
of machinery and administrative
expenses, must be paid, regardless of
the number of units that an
organization produces and sells. This
enables large firms that utilize their
equipment effectively to produce at
much lower costs per unit.
INTERNAL economies of scale
(often abbreviated to economies
of scale) can be classified under a
number of headings including:
Technical Economies
Specialisation Economies
Purchasing Economies
Marketing Economies
Financial Economies
Research and
Development Economies
Social and Welfare
Economies
Managerial and
Administrative
Economies
DIFICULTIES INCREASING
LABOUR PRODUCTIVITY AND
EFFICIENCY
DISECONOMIES OF SCALE
As organisations grow, they may suffer
disacvantages that lead to a lowering of
efficiency and higher unit costs of
production. These are known as
DISECONOMIES OF SCALE or INTERNAL
DISECONOMIES OF SCALE. Some
examples are as follows:
Co-ordination diseconomies
Communication Disconomies
Motivation Diseconomies
Other Diseconomies of Scale
HOW TO CHOOSE THE
OPTIMAL MIX OF
RESOURCES
Factors influencing the choice
between capital-intensive and
labour-intensive production
Methods of Production
Skills and efficiency of the
factors of production