CHAPTER 1: PRODUCTION AND THE
FACTORS OF PRODUCTION
PRODUCTION
Meaning of Production
Production is the process of converting resources into goods and services in order to satisfy
human needs and wants.
Businesses carry out production to earn profit for their owners.
Needs and Wants
Needs: Needs are essential for survival.
Examples:
● Food
● Water
● Shelter
● Clothing
Wants: Wants are desires that improve comfort but are not necessary for
survival.
Examples:
● Cars
● Books
● Holidays
● Restaurants
● Confectionery
MANUFACTURING
Manufacturing is a type of production where goods are made from raw materials and
components.
Manufacturers use:
● Labour (workers)
● Machinery
● Tools
● Equipment
● Factories
Mass Production
Mass production means producing goods in very large quantities using complex machinery
in big factories.
Examples:
● Cars
● Electrical goods
● Soft drinks
● Breakfast cereals
Mass production reduces cost per unit.
Small-Scale / Handmade Production
Some goods are made by skilled workers in smaller quantities.
Examples:
● Jewellery
● Suits
● Furniture
● Boats
These goods are usually more expensive because they are handmade.
TYPES OF GOODS
Consumer Goods
Goods bought by final consumers (people like you and your family) to satisfy needs and
wants.
Examples:
● Clothes
● Food
● Mobile phones
Intermediate Goods
These are components used by other manufacturers to produce finished goods.
Example:
Alloy wheels made by OZ Group for car companies like Mercedes or BMW.
Capital Goods
Goods used in the production of other goods or services.
Examples:
● Machines
● Tools
● Equipment
● Construction vehicles
Example of capital goods manufacturer:
JCB
PROVISION AND DELIVERY OF
SERVICES
In many developed countries such as:
● Germany
● France
● United States
● Japan
Most production involves providing services.
Services are divided into two main types:
1.DIRECT SERVICES (PERSONAL SERVICES)
These services are provided directly to consumers.
Examples:
Financial Services
● Banking
● Insurance
● Loans
● Investment management
Telecommunications and IT Services
Personal Services
● Hairdressing
● Dry cleaning
● Personal trainers
● Wedding organisers
Care Services
● Elderly homes
● Special needs centres
Education
● Schools
● Universities
Public Transport
● Bus
● Rail
● Taxi
● Air travel
2.COMMERCIAL SERVICES
Commercial services support businesses in distributing goods and services.
They are divided into:
A) Trade
Trade is the exchange of goods and services for money.
Types of Trade:
● Domestic trade (inside country)
● International trade (between countries)
Examples:
● Export agencies
● Import agencies
● Retailing (shops and online selling)
B) Aids to Trade
These are indirect services that help businesses trade smoothly.
Examples:
Communication
● Telephone
● Internet systems
Transport
● Shipping
● Road transport
● Air flight
Advertising
● TV adverts
● Newspaper adverts
● Online ads
Banks are involved in both:
● Direct services (to consumers)
● Commercial services (to businesses)
THE FOUR FACTORS OF PRODUCTION
The resources used to produce goods and services. They include land, labour, capital and
enterprise
Production depends on four main resources:
LAND
Land includes:
● Physical land for buildings
● Natural resources such as:
○ Oil
○ Coal
○ Iron ore
○ Forests
○ Rivers
○ Fertile soil
Example:
Milk, sugar and cocoa beans used in chocolate production.
LABOUR
Labour is the human workforce in the economy.
Includes:
● Manual workers
● Skilled workers
● Managers
Workers differ in:
● Skills
● Knowledge
● Experience
● Ability
Better skilled labour increases productivity.
CAPITAL
Capital is a man-made resource used in production.
There are two types:
Fixed Capital
Long-term assets used repeatedly:
● Factories
● Offices
● Machines
● Equipment
● Furniture
Working Capital (Circulating Capital)
Items used up in production:
● Raw materials
● Components
● Stocks of finished goods
ENTERPRISE
Enterprise is the factor provided by entrepreneurs.
Entrepreneurs:
● Generate business ideas
● Provide capital
● Organise resources
● Hire labour
● Make decisions
● Take risks
They are responsible for:
● Profit if business succeeds
● Loss if business fails
Entrepreneurs must have:
● Decision-making skills
● Financial judgement
● Time management
● Leadership skills
Without entrepreneurs, production would not take place.