Production
Topic Five

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Production

Production is really the use of inputs to make an output; it is any activity directed to the satisfaction of other peoples’ wants through exchange. This will mean that not all that are made is production. What is produced must be able to satisfy a want or a need.  The making of things which are not wanted or are made just for the fun of it does not qualify as production. On the other hand, all jobs which do aim at satisfying wants are part of production.  Employees who provide services such as bankers, insurers and caterers are all part of the production process.  The test of whether or not any activity is productive is whether or not anyone will buy its end-product.

Factors of Production

Factors of products are those resources used to produce goods and services.  There are four main factors of production which are land, labour, capital and entrepreneurship.

Labour

Labour represents the human capital available to transform raw or national resources into consumer goods. Human capital includes all able-bodied individuals capable of working in the economy and providing various services to other individuals or businesses.

Characteristics of Labour

A main characteristic of labour is that it is perishable plus labour cannot be stored.  Another characteristic of labour is that it cannot be separated from the labourer.  Land and capital can be separated from their owner, but labour cannot he separated from a labourer.  For example, it is not possible to bring the ability of the banker at the bank but leaving the banker at home.  Still another characteristic of labour is that it is inelastic in supply.  This means that the supply of labour cannot be increased or decreased if the need requires.  For example, if a country has a scarcity of a particular type of workers such as dentists, their supply cannot be increased within a day or even a month or a year.

Land

Besides labour, the other factors of production are land, capital and entrepreneur.  Land is the economic resource encompassing natural resources found within an economy. This resource includes timber, land, fisheries, farms and other similar natural resources. Land is usually a limited resource for many economies. Although some natural resources, such as timber, food and animals are renewable, the physical land is usually a fixed resource. The reward for land is rent.

Characteristics of Land

Land is free gift of nature - land is not produced or man-made and so we have to accept it as it is.

Land is limited in area - land surface of the world is remaining unchanged even though some can be reclaimed from the sea.     

Land is permanent - land as a factor of production is not easy to destroy. The other factors are destructible but land cannot be completely destroyed.

Land lacks mobility - land cannot move physically from one place to another. It lacks geographical mobility.

Capital

Capital has two economic definitions as a factor of production. Capital can represent the monetary resources companies use to purchase natural resources, land and other capital goods.   Capital also represents physical assets that individuals and companies use when producing goods or services. These assets include buildings, factories, equipment, vehicles and other similar items. The reward for capital is interest.

Characteristics of Capital

Capital, as a factor of production, has certain special characteristics. They are:

Dependence on savings - capital can be obtained by postponing the present consumption and transferred to saving; this means that when people save money, it becomes capital because firms borrow these savings to purchase capital which includes equipment.

Man-made - capital is not a natural resource; it is a man-made resource over a period of time.

Variability - capital is variable in that it can be increased or decreased according to individuals’ will and wish.

Depreciates - machines in an industry are also known as capital. When machinery is continuously used, it is subject to normal wear and tear which means that it depreciates.

Mobility - capital can mobile very easily.

Entrepreneurship/Enterprise

Entrepreneurship/enterprise is considered a factor of production because economic resources can exist in an economy and not be transformed into consumer goods In essence, entrepreneurship is the process of starting a business for the purpose of transforming resources into finished products and/or services. The reward for entrepreneurship is that of profits.

Characteristics of Entrepreneurship:

Entrepreneurship is characterized by the following features:

Economic and dynamic activity - entrepreneurship is an economic activity because it involves the creation and operation of an enterprise with a view to creating value or wealth by ensuring optimum utilization,

Related to innovation - entrepreneurship involves a continuous search for new ideas and forces an individual to continuously evaluate the existing modes of business operations so that more efficient and effective systems can be evolved,

Profit potential - profit is the level of return or compensation to the entrepreneur for taking on the risk of developing an idea into an actual business venture; entrepreneurs are motivated by profits,

Risk bearing - the foundation of entrepreneurship is the willingness to take on risk  arising out of the creation and implementation of new ideas.

Difference between Production and Productivity

Production is the process of combining units of inputs (natural, man-made and human resources) to create output (goods and services) capable of satisfying human needs and wants.

Productivity is the increase of output from each unit in the production process.  There are several ways of achieving productivity. These include the training of workers and the introduction of machinery and equipment into the production process.

Importance of Productivity

Productivity increases output. High productivity results in lower cost per unit of output resulting in higher levels of profit for a business. There are eight main factors that affect productivity and these are:

Technical factors - productivity largely depends on technology and more so on modern technology. If the business uses the latest technology, then its productivity will be high.

Production factors - The production of all departments should be properly planned, coordinated and controlled. The right quality of raw-materials should be used for production.      

Organizational factor - A simple type of organizational structure should be used.  This will allow for authority and responsibility of all employees to be clearly defined so that there will be no communication problems.

Personnel factors - The business must have the right fit meaning that the employees need to be qualified and experienced in their respective areas of expertise. 

Financial factors – The source of finance should be in line with the size and scope of the business operations.  For example, the business should not borrow excessively or find itself in a position where it cannot repay its debts,

Management factors - The management approach of organization should be scientific, professional, future-oriented, sincere and competent. The style of leadership should be a democratic one where employees can be motivated and can participate in the operations in the business. 

Government factors - Management should have a proper knowledge about the government rules and regulations. They should also maintain good relations with the government as well as comply with its laws and regulations. 

Location factors - productivity also depends on location factors such as closeness to market, nearness to sources of raw-materials and skilled workforce. Closeness to market will impact positively on the business’s success as it will be better positioned to deliver its goods and services to its customers.

The Role of Capital in Production

Capital refers to assets such as machinery, equipment, inventory and cash that are used to start and continuously operate a business.  Capital can be either fixed or circulating.  Fixed capital includes machinery, equipment and vehicles owned by the company. Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash balances. These assets can easily be converted into cash. Working capital is the cash available for the daily operation of the business. It is used to pay workers, utilities and purchase raw materials.

Levels of Production

Production levels can be categorized as subsistence, domestic production and export production.

Subsistence production - is the lowest level of production and represents the output from the production process that is just enough for the survival. This amount of production is therefore not adequate to meet all possible needs and wants of families, society and the entire country.

Domestic Production - Domestic production refers to production that is more than what is required for survival.  The production is adequate to satisfy needs and wants of families and society but there is no surplus.

Surplus or export production - is production that is adequate to supply local demand and for export.  Large industries can produce large quantities of output to satisfy local consumption and earn foreign exchange from export.

Types of Production

The types of production are primary production, secondary production and tertiary production. 

Primary production comprises of factors of the land and the sea and is carried out by ‘extractive’ industries like agriculture, forestry, fishing, mining and oil extraction.

In secondary production, countries take the raw materials from the primary sector and convert them into semi-finished products.  This sector can be seen as the construction, manufacturing and even the industrial sectors.  

In the tertiary is sector, services are provided.  The service sector is comprised of firms offering intangible goods. The following are some of the services that constitute the tertiary sector: retail industry, hotels and tourism services, restaurants and cafes, transportation, communication, banking services, insurance services, medical services, dental services and postal services.

Characteristics of Cottage Industries

A cottage industry is a small-scale industry often operated out of a home, rather than out of a factory. Cottage industries are defined by the amount of investment required to start, as well as the number of people employed. They often focus on the production of labour-intensive goods. 

Linkage Industries

Forward linkage is when the final output of an industry is used as raw material in another industry.  If the final product or finished products of one industry is used in another industry as its raw material then a forward linkage occurs. For example, flour produced from a flour mill is used by a bakery to make pastries.

A backward linkage occurs when the demands of an industry leads to the establishment of other industries to produce for the needs of this industry. For example, the establishment of several multinational fast food restaurants in the Caribbean has led to new businesses being established to supply these restaurants with raw materials (vegetables, ground provisions, meats and paper based products).

Functions of a Small Business

Businesses have different functions besides the profit motive.  Some of these functions are a follows:

Supplying goods and services that satisfy demand - Identifying a particular need in a market based on market research and developing and supplying a product that will meet the needs and wants of consumers.

Creating employment - When businesses begin operations, this will have the effect of reducing unemployment.

Making profits - The main purpose of starting and operating a business is to make profits. 

Effects of Growth on a Business - Internal vs. External Strategies

Business growth strategies come in two types: internal and external. Internal, or organic, growth

strategies rely on the company's own resources by reinvesting some of the profits. Internal growth is planned.  In an external growth strategy, the company draws on the resources of other companies to leverage its resources.

Internal growth also called organic growth happens when a business expands its own operations rather than relying on takeovers and mergers. Organic growth can come about from:

  • Increasing existing production capacity through investment in new capital & technology
  • Development and launch of new products
  • Finding new markets for example by exporting into emerging countries
  • Growing a customer base through marketing.

External growth strategies develop actual company size and asset worth. External strategies focus on strategic mergers or acquisitions, increasing the number of mutual relationships through third parties, and may even include franchising the business model.

A merger is an external business growth strategy that occurs in two ways: takeover and amalgamation. A takeover is a special form of acquisition that occurs when a company takes control of another company without the acquired firm’s agreement. Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has the permission of the target company’s board of directors to purchase and take over the company.  A joint venture is when two or more companies decide to establish a new business enterprise to exploit a specific business opportunity. A joint venture is a quick and efficient way to exploit a business opportunity.

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