Chapter 9 - Production & Productivity

1. Chapter 9 - Production & Productivity

2. Gross Domestic Product (GDP) • GDP is the market value of all final goods & services produced within a nation’s economy for a given period of time • Production is important because it determines income, and income determines consumption. • U. S. Commerce Dept. measures GDP by adding purchases of all final goods & services produced during a year or a quarter (not used products)

3. Shortcomings of GDP • GDP does not accurately measure the well-being of a population. • GDP can’t accurately measure changes in production from year to year or inflation • Inflation - a period of rising prices when the purchasing power of the dollar is falling • Divide real GDP by total population = per capita real GDP (best indicator of changes in a nation’s standard of living - a measure of the amount of goods & services available to citizens)

4. Labor Productivity • Labor productivity - the amount the work force can produce in a given time • Relationship between productivity and GDP: 1. As productivity goes up, people produce more & better products in the same period 2. Increasing labor productivity is the main force behind per capita GDP & consumption

5. What makes productivity improve? • The quality of human resources- education & training can increase productivity • The quality of management– managers find ways to save time & effort (Henry Ford – interchangeable parts & the assembly line; W. Edward Demings & “Total Quality Management” ideas on page 142) • Increases in the quantity & quality of capital resources – new machinery helps workers to be more productive • Technological change (or innovation) – new technologies have made production faster & easier

6. Innovative Ideas • Google & Sun Microsystems use the Internet to communicate & do business using the Internet • This required technological change (the Internet), investing in new capital resources (computers & software), and education & training of workers (improving the quality of human resources) which has resulted in increased productivity

7. Total Quality Management (TQM) Focus on making improvements throughout the entire production process (“kaizen” - Japanese word that describes this concept) • Customer satisfaction • High-quality work • Employee Involvement (listen to employees • Shared vision

8. Why Costs Change as Production Changes 1. Fixed Costs- (or overhead) costs that remain the same regardless of how much business a firm does 2. Variable costs- those that can increase as the number of units produced increases (raw materials, electricity, wages, etc.) Fixed Costs Plus Variable costs = Total Costs As production increases, the amount of variable costs goes up which increases the total production costs

9. The Law of Diminishing Returns • As more & more variable resources (such as workers & materials) are added to a fixed amount of other resources, the additional (marginal) amount produced eventually diminishes * This is why sellers will offer more at higher prices (the law of supply)

10. Economies of Scale • Reductions in cost resulting from large-scale production 1. Mass production & division of labor (Frederick Taylor) 2. Use of complex equipment reduces costs 3. Investing in research & development reduces production costs and results in new and improved products

11. Productivity & LaborChapter 10

12. Wages & productivity Rising productivity is the key to an economy’s growth over time & is the key to higher wages 1. Higher wages supported by higher productivity do not increase the cost of producing goods & services 2. Consumers get new & better products at lower prices 3. Wages & profits have risen over time

13. Why it matters • About 70% of men & slightly over 60% of women are in the labor force today. • Most people will be in the labor force for at least 40 years! • 2 sources of income: 1. income from work - the main way to accumulate savings 2. income from wealth – earn interest from investments

14. Labor Demand & Supply 1. As demand for labor rises, its wage rate goes up too. 2. Higher wages eliminate labor shortages (for example, nurses and pharmacists)

15. Changes in the Labor Force • Labor force - all people 16 years + who are currently employed or looking for work • 3 U. S. Labor Sectors: 1.Agriculture– from 90% in the 1700s to only 2.5% now 2. Manufacturing- around 10% now (& declining) 3. Services- most jobs are service-related now (at least 70% of jobs today are service-related)

16. Why Different Workers Earn Different Amounts: 1. Differences in ability 2. Differences in effort and jobs 3. Experience 4. Education & training Nonmarket Forces: 1. People like to stay where they are 2. Job discrimination 3. Government legislation (Affirmative Action) 4. Labor unions

17. Labor Unions Associations of workers that seek to promote goals such as higher wages, increased benefits & improved working conditions

18. Types of unions • Craft union – skilled craftsmen in a particular trade (plumbers, millwrights, pipefitters, masons, electricians, etc.,) *American Federation of Labor hired this type of workers • Industrial union – includes both skilled and unskilled workers (miners, steelworkers, automotive workers, etc.,) *Congress of Industrial Organizations hired this type of workers • Union Shop – nonunion members can be hired by the business only if they join the union once hired

19. Unions & the Labor Market • Methods unions use to accomplish goals: 1. Restrict membership or lengthy apprenticeships = higher wages because of a smaller supply of labor 2. Collective bargaining- negotiation between labor & company managers Alabama is a “right to work” state – union membership can’t be required for hiring

20. Early unions • Knights of Labor (1869) • American Federation of Labor (1886) a craft union (includes skilled workers in a particular trade) led by Samuel Gompers • Congress of Industrial Organizations (1938) an industrial union (skilled & unskilled workers) formed by John L. Lewis • AFL-CIO joined together in 1955

21. Major Labor Legislation 1. The Norris-LaGuardia Act of 1932- limited the ability of courts to use injunctions in labor disputes (stopped “yellow-dog contracts” – promise not to join a union or would be fired) 2. The National Labor Relations Act of 1935(Wagner Act)- guaranteed workers’ rights to join unions & engage in collective bargaining & prohibited unfair labor practices 3. The Fair Labor Standards Act of 1938- minimum wage & 40-hour work week and overtime pay (time & 1/2 for anything over 40) .25 per hour was the first minimum wage!

22. Major Labor Legislation 4. The Labor-Management Relations (Taft-Hartley) Act (1947)- prevented employees from engaging in “unfair labor practices”, outlawed closed shops & allowed union shops 5. The Labor-Management Reporting & Disclosure Act of 1959 (Landrum-Griffin Act) - sought to improve union elections & fairness

23. Union and Management in Action Settling Disputes: 1.Conciliation- 3rd party will try to bring labor & management together to work out problems on their own 2.Mediation- 3rd party listens to both sides & makes suggestions 3. Arbitration- 3rd party listens to both sides & hands down a final decision (legally binding)

24. When Discussions Break Down: • Management- lockout, injunction, hire replacement workers (or “scabs”) 2. Unions- picketing, strike, boycotts, union shops