Final answer:
The definition of a firm's productivity is the ratio of its outputs to its inputs. Productivity is important for operational efficiency, cost management, and maintaining a competitive edge. Firms strategize on labor and capital to maximize their productivity, possibly incorporating more automation or technology.
Step-by-step explanation:
The ratio of a firm's outputs (goods and services) to its inputs (people, capital, materials, energy) defines the firm's productivity. Productivity is critical for a firm because it can influence profit margins, competitive advantage, and overall effectiveness in the production process. Firms make strategic decisions based on technology and the combination of labor and physical capital to optimize their productivity. They might opt for more automation and mechanization or decide to continue with more labor-intensive practices, depending on various factors, including labor costs, available technology, and desired output.
For instance, a firm may decide to use a computerized recordkeeping system rather than file clerks and secretaries to increase productivity. Moreover, firms may also shift towards more physical capital-intensive production methods if they are faced with increasing labor costs due to union demands. Overall, productivity measures how efficiently a firm turns its inputs into outputs.