Basic Concept of Prodution

Understanding Production in Economics

Production is the process of transforming inputs (raw materials, labor, machinery) into goods and services that people want. Nigerian factories like Dangote Cement turn limestone and other materials into cement bags. Farmers in Kano convert seeds, fertilizer, and labor into tomatoes and onions. Even barbers provide production—they transform your time and their skills into a haircut service.

But producing goods is not enough. Businesses must produce efficiently. This is where productivity comes in. Productivity measures how well you use resources. A factory that produces 10,000 bottles with 20 workers is more productive than one producing 8,000 bottles with the same 20 workers.

Total Productivity

Total productivity refers to the complete output from all factors of production during a specific period. It answers the question: “How much did we produce in total?”

For example, if a Nigerian garri processing plant uses 50 workers, 10 machines, cassava tubers, and a factory building to produce 5,000 bags of garri per month, the total productivity is 5,000 bags.

Formula: Total Productivity = Total Output

Total productivity includes everything produced regardless of how many workers or machines you used. It gives the big picture but does not tell you efficiency. A company might have high total productivity simply because it employs many workers, not because those workers are efficient.

Average Productivity

Average productivity shows output per unit of variable input. It measures efficiency better than total productivity because it accounts for resource use.

Formula: Average Productivity = Total Output ÷ Units of Variable Factor

If that garri plant produces 5,000 bags using 50 workers, the average productivity of labor is:

Average Productivity = 5,000 ÷ 50 = 100 bags per worker

Average productivity helps managers compare efficiency across time periods or between factories. If next month the same plant produces only 4,500 bags with 50 workers, average productivity falls to 90 bags per worker. Management knows something went wrong—maybe machines broke down, or workers received poor training.

Nigerian companies often track average productivity for labor because labor is usually the largest variable cost. Knowing each worker produces 100 bags helps with budgeting and planning.

Marginal Productivity

Marginal productivity measures the change in total output when you add one more unit of variable input (usually labor or capital). It answers: “What do we gain by hiring one more worker or buying one more machine?”

Formula: Marginal Productivity = Change in Total Output ÷ Change in Variable Input

Suppose our garri plant currently employs 50 workers producing 5,000 bags. The manager hires a 51st worker, and output rises to 5,080 bags. The marginal productivity of that worker is:

Marginal Productivity = (5,080 – 5,000) ÷ (51 – 50) = 80 bags

This concept is crucial for business decisions. If hiring another worker costs ₦40,000 per month but adds only 20 bags worth ₦30,000, the business loses money. Smart managers keep hiring until marginal productivity falls below the cost of the input.

Law of Diminishing Returns and Marginal Productivity

The law of diminishing returns states that as you keep adding more variable inputs to fixed inputs (like land or machinery), marginal productivity eventually falls.

Imagine a small bakery in Lagos with two ovens (fixed capital). With one baker, output is 50 loaves daily. Add a second baker, output jumps to 120 loaves (marginal productivity = 70). Add a third, output reaches 180 (marginal productivity = 60). Add a fourth, output hits 220 (marginal productivity = 40).

Notice marginal productivity is falling (70 → 60 → 40) even though total output still increases. Why? The ovens become crowded. Bakers wait for oven space. They bump into each other. Eventually, adding a fifth baker might add only 10 loaves because the fixed capital (ovens) limits what extra workers can do.

This is why businesses must find the optimal level of production—the point where marginal productivity matches input cost.

Relationship Between the Three Concepts

Practical Example: Textile Factory in Kano

A textile factory employs different numbers of workers with 20 sewing machines (fixed). Here’s how output changes:

• 10 workers: 400 shirts per day (Average = 40, Marginal = 40)
• 20 workers: 900 shirts per day (Average = 45, Marginal = 50)
• 30 workers: 1,350 shirts per day (Average = 45, Marginal = 45)
• 40 workers: 1,700 shirts per day (Average = 42.5, Marginal = 35)
• 50 workers: 1,950 shirts per day (Average = 39, Marginal = 25)

Notice how marginal productivity peaks at 20 workers (50 shirts) then falls. By 50 workers, each additional worker adds only 25 shirts—machines are fully utilized and workers get in each other’s way. The manager should not hire beyond 30-40 workers unless they buy more machines.

Common Exam Mistakes

Practice Questions

Multiple Choice Questions

1. A factory produces 2,000 units using 50 workers. What is the average productivity of labor?
   a) 2,000 units
   b) 50 units
   c) 40 units ✓
   d) 100 units
2. When a firm hires the 11th worker and output increases from 550 to 600 units, the marginal productivity is:
   a) 600 units
   b) 550 units
   c) 50 units ✓
   d) 60 units
3. Which statement about productivity is correct?
   a) Marginal productivity always increases when more workers are hired
   b) Average productivity equals total output
   c) Total productivity includes output from all factors of production ✓
   d) Productivity and production mean the same thing
4. The law of diminishing returns causes marginal productivity to fall because:
   a) Workers become lazy
   b) Fixed factors limit what variable factors can do ✓
   c) Raw materials run out
   d) The government increases taxes

Essay Questions

1. Distinguish between total productivity, average productivity, and marginal productivity. (6 marks)

Tip: Define each term, give formula, and provide one example showing how they differ.

2. A bakery has the following production data:

• 3 bakers: 90 loaves
• 4 bakers: 130 loaves
• 5 bakers: 165 loaves
• 6 bakers: 192 loaves

(a) Calculate average productivity for each level of labor. (4 marks)
(b) Calculate marginal productivity for the 4th, 5th, and 6th baker. (3 marks)
(c) Explain why marginal productivity changes as more bakers are hired. (3 marks)

Tip: Show your calculations clearly. For (c), mention fixed factors (ovens) and how they limit additional workers.

3. Explain four reasons why marginal productivity eventually decreases when a firm keeps adding variable inputs to fixed inputs. (8 marks)

Tip: Think about overcrowding, equipment limits, coordination problems, and optimal worker-machine ratios. Use Nigerian business examples.

Memory Aids

TAM acronym for productivity types:

• Total = Total output (the whole thing)
• Average = Total ÷ variable factor (per unit)
• Marginal = Change in output (what’s added)

Remember marginal productivity: “MARGIN means EDGE” – what happens at the edge when you add ONE MORE unit.

Diminishing returns: Think of a danfo bus. First 10 passengers fit comfortably (high productivity). By passenger 20, people squeeze. Passenger 25 barely fits, adds little value—that’s diminishing marginal productivity!

Related Topics

• Production Definition
• Factors of Production
• Optimum Theory of Production
• Scale of Production
• Production Possibility Curve