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Principles of Business
Topic Five


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 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.


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.


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.


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.

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.

Productivity is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other gross domestic product (GDP) components such as business inventories. Productivity measures may be examined collectively (across the whole economy) or viewed industry by industry to examine trends in labor growth, wage levels and technological improvement.

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 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. Small-scale cottage industries are also an important source of employment, especially in rural areas. Farmers, operating a cottage industry out of the home can supplement the income raised from selling crops. For small villages, a cottage industry can allow local residents to come together to produce crafts for sale in local markets, or even for export to larger cities and other countries.

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).

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.