Production Gap

Categories: Econ

A production gap is the gap between the could-be production and the actual production. Remember when your mom told you growing up that you needed to “live up to your potential”? Well, firm-moms tell firms that they need to “fill [their] production gap[s].”

How do we know exactly what potential production is? We can only know the production gap if we know the true full potential, since: Production Gap = Full Potential of Production - Actual Level of Production.

Short answer: we don’t know. But we try. For instance, it’s pretty easy to calculate the production lost when an accident happens, like a natural disaster. Earthquakes, fires, and floods don’t give a darn about your usual level of production.

Other than than, a gap analysis has to carefully analyze a company to determine its potential before it can figure out the production gap. There may be departments doing redundant or overlapping work. They might be having a hard time finding the right person for some vacant job positions. They might have had to switch suppliers, or consumers might have different preferences they must adapt to.

Like your mother said, mind the gap.

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Econ: What are Production Functions?2 Views

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And finance Allah Shmoop what Our production functions well Grandma's

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air The source of all A lot of useful wisdom

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it Yeah well that one actually works for economics to

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it's the basic sentiment behind the production functions The production

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function is a process that economists used to show how

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much stuff you can make for every potential combination of

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input It's essentially a mathematical equation based on data gathered

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through the production process And it allows companies to graph

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what production would look like given different inputs You know

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they consider different questions Like what if we use more

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workers Or what if we bought Mohr equipment You know

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some big fancy factory with robots What if we replaced

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the dehydrated milk in our baby formula with pot ash

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All right well these are the kinds questions of production

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function answers and well then businesses can allocate their resource

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is in the most efficient way possible Well they find

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the point on the graph where they get the most

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out of what they're putting in and that's what they

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shoot for McDonald's is slowly replacing human workers with robots

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Well how do they know if it's a good investment

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Well they asked the production function or at least look

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at it a fry flipping robot Kaswell ten thousand dollars

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at volume It costs another two thousand dollars a year

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in maintenance and appreciation per year and that fry flipping

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baht can cover one friar And there are five fryers

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at the restaurant so it takes five bots to replace

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one worker or about fifty grand to replace that one

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worker Wealthy company does some trials and finds that a

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fry flipping robots can do the job two times faster

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than one person In actuality or reality that person cost

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twenty dollars an hour after salary of fifteen bucks and

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then taxes and all the everything's company has to pay

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pension health care all that stuff So over the course

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of a year a fulltime fried flipper cost McDonald's forty

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thousand dollars well to replace the employees the company needs

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five bots costing a total of fifty grand It'll cost

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another ten thousand dollars total in the maintenance and appreciation

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But the Frye body is twice as fast as the

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worker meaning McDonald's Khun turnover twice a cz many fries

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So you'd need to workers to match the output of

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the fry bots Well the bots cost say sixty thousand

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dollars in Year one And yes we're making up a

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lot of numbers The workers costal eighty thousand those two

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workers But the company is already in the black They've

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made twenty thousand dollars in savings by replacing those low

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skilled workers with robots Well the production function can have

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many variables in practice The production function depends on the

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product being produced Different products require different levels of inputs

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and the relationships between the inputs are different That cab

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all of relationships includes things like land and labor and

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capital in raw materials and time However many of these

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dropout is being irrelevant or they get combined and kind

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of fade away Key idea here is that the simple

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version of all of this has two variables to variable

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inputs There's labor that's usually represented by a big fancy

03:18

capital L And then there's capital that's usually represented by

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you Hey there And this combo gives you the quantity

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of output like in the equation And this gets a

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queue right Belle Plus Que is cute that's in its

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simplest form and that's the production function And that's what

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it looks like The amount of labour and the amount

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of capital gives you the amount of output The production

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function can help measure the marginal productivity of one factor

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of production It can also help figure out the least

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expensive and most efficient way to make a product like

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Say you're going to make pies with Grandma You're going

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to need to spend a little capital on ingredients and

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you know pie tins Well that's the capital That's the

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big K You've also got labor That's you And grandmama

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That's the big Al there for labor Enough for losers

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Sorry Grandma Alright now onto your production function right there

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Well you could decide whether getting some more money for

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ingredients will help you bake more pies Or if you

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call your cousins to help with the baking and Ad

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Tio El there Or you could do both Now we

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just need to talk to Grandma about her musical taste 00:04:17.677 --> [endTime] Yeah

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