Does productivity improvement lead to reduction in cost of production? Explain your views.
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Productivity of an organization is defined as the ratio of outputs produced by the organization and the resources consumed in the process.
Here the output refers to the quantity of and services produced by the company, and inputs refers to the quantities of resources such as labor, material, physical facilities, and energy consumed for producing the same.
Productivity is used to assess the extent to which we can produce goods and services from a given quantity of inputs. We can measure productivity for a single input resource such as manpower used, or for multiple resources. There can be many different types of productivity measurement depending on the type of resources considered. Some of the most common types of productivity measurements include labor productivity, machine or capital productivity, material productivity, machine productivity.
We can also measure combined productivity of all the inputs used for production. This is best done by measuring productivity as production per dollar of money spent on inputs used for production. For example, we can measure productivity of as steel produced per ton of iron ore consumed, per person employed for production, or per dollar of total production cost.
Higher productivity implies that we are using less resources for producing the same quantity of production. Alternative, it means that we are getting more outputs per unit of inputs used. This in turn means that we are spending less money per unit of production.
However in using this logic, for just one of the many inputs of production, we should be careful to ascertain that reduction in cost of one type of inputs does not result in more than matching increase in cost of other inputs. For example, it may be possible to reduce labor cost by increasing the pace of production, but this may in turn lead to higher material wastage, and thus higher total cost.