The value of output (goods and services) produced per unit of input (productive resources) used. Thus an increase in productivity means producing more goods and services with the same amount of resources, or producing the same goods and services with fewer resources, or some combination of these two possibilities. While productivity is often measured or referred to only in terms of the productivity of labor (output per man-hour), a more precise and complete view of the sources of productivity incorporates the effects of all inputs to production, including capital, land and materials. The principal means of increasing overall productivity are: Greater specialization and a more complex division of labor (often involving a geographical or territorial expansion of the relevant market area, incorporating new people with different skills and endowments of natural resources) Investment in increasing the stock of capital goods Investment in so-called human capital (for example, teaching workers new or more efficient production skills Technological innovation that creates new ways of combining somewhat different inputs of the factors of production to produce the same goods at lower costs.
The concept of the marginal productivity of an input in a productive process is a particularly important idea in economic analysis, because under competitive conditions, the equilibrium price of a factor of production (including wages, interest etc) will tend toward equality with its marginal productivity. Marginal productivity is the increase in the value of output that can be produced by adding in one more unit of the particular input while holding other inputs constant. Thus the higher the productivity of a factor of production, the higher the income that may be expected to accrue to its providers, and anything that raises overall levels of productivity within a society may be expected to increase the average overall prosperity of the society as a whole.
[See also: marginal analysis , supply, law of , factors of production , capital , land , labor , human capital , diminishing returns, law of ]