Production
This is the creation of goods and services that are capable of satisfying mans wants and needs.
Productivity
This is the context to which a business uses its resources to produce goods and services.
Formula for Productivity
Formula for productivity = Output
Input
Factors of Production
These are the inputs necessary in order for production to take place
Types of Factors of Production
1. Land or natural resources – These are the free gifts of nature used in the production of
goods and services e.g. sunshine, rainfall, oceans, desert, soil, etc.
2. Labour or human resources – This refers to the energy, skills an talents that are used in
the production of goods and services.
Labour can be classified as:
(a) Skilled – This means having a special ability to perform a task such as engineers,
lawyers, etc.
(b) Semi-skilled – This means having a practical ability to perform a task e.g. an apprentice
(c) Unskilled – Someone who posses no special ability e.g. Vendors or watchmen
Factors that determine the supply of labour
a) Rate of growth of the population- If the population is growing at a fast rate and
migration is constant, then, the labour supply will increase
b) Structure of the population – An aging or very young population would mean a smaller
labour supply. Additionally, if it is the policy of the government to retire citizens, at an
early age. Then, this will also restrict the supply of labour.
c) Cultural Patterns and religious beliefs – If women are not allowed to work, the
availability of labour will be adversely affected.
d) Economic Conditions – In some countries the family “wage” is sufficient and this does
not require wives to work
e) Quality of the labour force – If the population has the appropriate skills and is healthy,
this will be reflected in the labour supply.
Efficiency of labour
This refers to how well employees perform the task that are assigned to them.
Factors which affect the efficiency of labour
a) The level of technology used
b) The management style of the leader
c) The salary offered
d) The opportunity that exists for promotion
e) The nature of the job itself
Capital or man-made resources
The refers to the money and all other assets that are employed in the process of production. It
include such things as buildings, machinery, motor vehicles, tools, equipment, etc.
Types of Capital
1. Fixed Capital – These are items that remains in the business for very long periods of time
and is used in the production of further wealth e.g. building, machinery and tools
2. Working Capital – These are things used-up in the day-to-day operations of the business
e.g. raw materials, cash stationery, etc.
3. Enterprise or Entrepreneurship- The entrepreneur is the individual that organizes and
coordinates the factors of production in order to provide goods and services.
Entrepreneurs take calculated risks to provide goods and services with the aim of making
a profit in the process
Supply of Labour – Refers to the number of individuals who are available for work at any given
time.
Types of Production
Primary – This is the first stage in the production process and involves the extraction of the free
gifts nature. E.g. removing fishes from the sea trees from the forest, minerals from the earth, etc.
Secondary – This is second stage in the production process and involve the conversion of raw
materials into semi – finish or finished goods e.g. trees are converted into lumber, minerals such
as gold is converted into jewellery
Tertiary – This is the final stage in the production process and involves the provision of services
that aids the production process e.g. banking, telecommunication, transportation, insurance, etc.
Levels of Production
Subsistence – At this level of production, goods and services are produced to satisfy the needs of
the individual an his/her family.
Domestic Production – Goods and Services are produced to satisfy local demand and the needs
of consumers within country.
Surplus or export production – This is the production of goods to satisfy local demand and for
export.
Industries
This can be defined as a group of companies that produces identical or similar products.
Types of Industries
1. Extractive Industries – These remove the raw materials from nature (link to primary)
2. Manufacturing Industries- These take the raw material harvested and converts them into
semi – finished / finished goods (link to secondary)
3. Construction – This use mainly manufactures goods such as cement to construct
buildings and sidewalks (Goods that are already finished)
4. Service – Provide services such as transportation to distributes goods to the consumer
(territory)
5. Small Business & Cottage Industries – Are businesses carried out within the home,
church halls and community centre.
Features of Cottage Industries
a) Small capital is needed and therefore the business usually begins the owner’s savings
b) The firm uses simple tools and equipment
c) The profits are usually ploughed-back into the business
d) They are usually one person businesses, partnerships or small family businesses
Importance of Cottage Industries
a) It provides employment
b) It adds income to the family budget
c) It provides the opportunity for one to use their skills
d) It makes use of the local material
e) It helps to earn foreign exchange for the country
In order for cottage industries to provide opportunities for employment, the following factors
must be considered:
I. Material for use in these industries must be easily accessible
II. There must be training programs to pass on the skills required
III. The financial support must be available through loans with low interest
IV. Trade shows must be mounted so that producers cab exhibit their wares.
Linkage Industries
This is an industry that is connected to another.
Types of Linkage
• Forward linkage - This where the finish product of one company becomes the raw
material that is converted into sugar. Sugar is then used as a raw material for
confectionery manufactures
• Backword Linkage – In this type of linkage a firm or industry obtains it raw materials
from and already established industry e.g. restaurant owners depending on the makers
of sanitary products.
Benefits of Linkage Industries
i. More jobs are created
ii. The skills of individuals are utilized
iii. The increase jobs bring more income and this creates the multiplier effects
iv. Better use can be made of the region’s resources
How an economy benefits from linkages
1) Through linkage, the local and regional economies benefits greatly because linkages
foster stronger economics ties.
2) More jobs are created, the skills level of people are enhanced, economics growth and
development takes place since raw materials from one industry is used in the production
of another product.
3) The operations of companies are much larger and more profit is earned.
Factors affecting the location of industries
Before an entrepreneur can decide on a site for his/her business, several factors must be
considered:
a) Geography – If the business is agricultural in nature, it must be situates where the
climatic conditions are appropriate
b) Raw materials – Nearness to raw materials can reduce cost considerably since they would
not have to be transported over long distances
c) Location of market – It has always better to situate a business close to the consumers who
needs the item.
Additionally, some produces are fragile, such as eggs and transportation them over long
distances could results in damage.
d) Location of energy sources – If the businesses activities require energy which is located
in a particular area, then, efforts should be made to situate the business close to the
energy source.
e) Availability of labour – The entrepreneur should consider locating his/her business where
appropriate and adequate labour exist.
f) Government policies – Certain industries are required by the state to be located in
specific area. For example, industrial sites
Small Firms
Characteristics
a) Small amounts of capital is required
b) Small sales turnover
c) Land space is limited
d) Limited number of employees
e) Use of simple technology
Roles and Functions of small firms
A) Provides personal services such as barbering, garment manufacturing (sewing)
B) It is able to respond to customers’ needs quickly
C) Helps in the redistribution of wealth as persons usually plough-back their profits
D) Increase national income and economics growth because small firms helps to increase
output
E) Act as a middleman (intermediary) as source of information (producer, consumer)
Survival of Small Firms
Small businesses continue to exists for the following reasons:
a) They are easier to manage
b) They personalize services such as decorating
c) They provide goods and services at convenient locations
d) There are fewer strips since management worker relationships are usually closer
Economies of Scale
These are the advantages enjoyed by a firm as the size of its operations expands.
There is a reduction in the unit cost of production and distribution because of the scale of
firms operations
Economies of scale can be classified as:
• Internal economies of scale
• External economies of scaler
Internal economies of scale – This occurs when the benefits are enjoyed by a single firm
Types of Internal economies of scale
1. Technical – Large firms are able to use modern and sophisticated pieces of technology in
their production process.
This contributes to increase outputs at a reduced cost along with greater efficiency and
standardization of goods and services.
2. Financial – Large businesses find it much easier to access financing since lenders are
more inclined to provide funding
3. Managerial – Large Businesses are able to attract and employ highly skilled and qualified
individuals. This allows better decisions making in the firm and the likely reduction of
waste.
4. Marketing – Large businesses are able to advertise their goods and services more heavily.
This creates demand for their goods and services.
5. Risk-bearing – Large businesses will usually spread their risk by providing several
products, purchasing from different suppliers or selling in markets.
External Economies of scale
This occurs when the benefits are enjoyed by several firms in an industry.
Examples of external economies of scale
• Construction of new roads, establishment of information centres.
• Establishment of car parks and hotels
• Establishment of restaurants and information communication technology centres
Diseconomies of Scale
This refers to the increasing cost associated with the growth and expansion of a firm
Some examples of diseconomies of scale are:
a) Lack of proper supervision because of the complexity of the organization
b) Poor communication between managers and staff leading to conflict.
c) Worker association are formed and as such workers have to be a part of decision-making
d) As the business expands, cost of production would increase more than output and
gradually the firm will begin to experience diminishing returns
Figure 1 Diagram showing economies of scale
Advantages of Small Firms
a) Flexible Opening and Closing Hours
b) More personal contact with consumers
c) They are located in small village and communities that are not serviced by large firms
d) They provide self-employment for many persons
e) They provide personal services
Disadvantages of Small Firms
a) Owners and managers may not have all the skills necessary to run a business successfully
b) There is limited leisure time
c) Limited financing hinders the growth of the business
Law of Diminishing Returns
This law states that when a fixed factor of production exists and more and more of variable
factors are added to the fixed factor, initially there would be an increase in output but after
some time a decline would be noticeable
Variable Total Average Marginal
Fixed Factor
Factor Output Output Cost
10 1 10 10 10
10 2 30 15 20
10 3 55 18 25
10 4 58 14 8
10 5 65 13 7
10 6 65 10 0
10 7 58 8 -7