PRODUCTION:

RECAP

Production means making things or producing an output.

The output can either be used by businesses to make further goods or can be consumed by end
consumers such as households.

The factors of production are: land, labor, capital, enterprise / entrepreneurship.

1. Land refers to all the natural resources.

2. Labor refers to both physical and mental contributions of employees.
3. Capital is the money and all other assets which are employed in the process of production.
4. Enterprise is the ability to coordinate and combine the various factors of production in an effort
to successfully run the organisation.

Industries developed in the Caribbean:

How does Production differ from Productivity?
Production means making goods and services out of resources.
Production is the number of units actually produced. Looks at
the value of total output.
Productivity is the ratio of output to input. It is a measure of
how much output can be produced from a given level of input.
Looks at the EFFICIENCY of the factors of production.

Production:

The Production Process: various business inputs during the

production process add value to outputs.
Productivity:
[Link]

Example: A Honda Car company produces 500 cars per hour with 1000 employees.

Productivity can be increased by:

1. Organizing work more efficiently. E.g. organizing the layout of machines in a factory in the order
of each stage of production to reduce time taken to complete an output.
2. Using more productive resources. E.g. using modern machinery or training employees to work
more efficiently.
3. Using automation or computerization. E.g. many factories today use robots or automatic
machinery, such as electronic eyes to stop fluid when containers are full.
4. Using motivational factors to encourage employees to work harder such as bonuses, perks, job
enlargement and job rotation.
Activity:
The Importance of Productivity
Rising productivity leads to:

 Increased incomes
 More export sales
 Higher profits for domestic firms

Government and Productivity:

National governments are keen to increase productivity because their country becomes more
competitive, producing greater and better output.
Key government policy will always relate to increasing the productivity of labor to make citizens
more productive.

Improving the labor supply

Labor supply refers to the number of hours that the labor force is prepared to work at given
wage rates. When examining the labor supply we need to consider not just how long people
work but also how hard and effectively they work.
Labor productivity should increase when employees work harder and longer. Furthermore,
employees need to work “smarter,” for example they need to use their time more efficiently to
produce more. If an employer can get the workforce to work “smarter,” this acts as motivation
because it is no longer necessary to work so hard or so long to get the best results.

Human Resource Development

Human resources are the employees who make up the workforce of an organization. Human
resource development involves improving the contribution made by employees at work by
providing opportunities for them to become more motivated and effective.
The human resources department will create systems such as appraisals and appraisal
interviews to identify ways in which employees are seeking personal development.
The importance of a positive work ethic

Productivity levels also depend significantly on the attitude employees have toward their work,
and how the work ethic varies between individuals. “A strong work ethic is central to effective
business and nation building, as well as building a strong Caribbean region.
Use of capital to increase productivity

Land and resources need to be used sustainably at a workable level, otherwise productivity
falls.
Explain the Role of Capital in Production

Role of Capital in Production

Capital plays a vital role in the overall production of good/services. Money

is needed for overall operation of the business e.g. purchase of equipment and
raw materials, payment of wages/salaries etc. The use of fixed capital (tools,
equipment) increases the productivity of labour. E.g. the use of a tractor rather
than a hoe can increase the rate at which a field is ploughed.
 The amount and type of capital a firm uses depends on the size and type of
industry in which it operates. E.g. the production of cars requires large factories
and specialised equipment while the production of leather goods can be done in a
small shop with little equipment.

With the use of capital, division of labour is made possible which in turn can
increase the level of productivity/ output per person.

Capital is also used for investment into various capital ventures. This can be
done by saving with financial institutions (banks, cooperatives etc.) which then in
turn loan the money to different organisations or entrepreneurs.

Types of Capital
1. Physical Capital
This consists of fixed and working capital.
2. Working Capital
Items required for the day to day operation of the business and which are continually being used
up e.g. raw materials, cash etc.

3. Fixed Capital
This usually refers to items which are long lasting and are used in the production of goods and
services e.g. buildings, machinery, tools etc.

4. Financial Capital
Money which is used to run the operations of the organisation. It consists of loan capital and
share capital

5. Social Capital
This takes the form of government expenditure on factories, machinery, roads, utilities etc. The
infrastructure is then used by organisations to assist in effective operations.

Types of Production:

1. Extractive/Primary Sector

This type of production involves the extraction of basic raw materials from the land e.g. mining,
agriculture, fishing, forestry. Some of these resources can be used directly or are used as the
raw materials of other industries to be converted to other goods.

2. Construction
This is part of secondary sector and uses products from the manufacturing area e.g. building
3. Manufacturing/ Secondary Sector
This sector generally uses the raw materials of primary sector to create other goods. E.g. sugar,
oil refining, canning, furniture and garment making etc.

4. Service/Tertiary Sector

This is known as the service sector where no “tangible” goods are produced. It is divided into
direst services which are needed for their own sake (education, health etc.) and indirect
services which are needed in order to exchange goods (transportation, communications,
banking etc.)

Read 11.5 we discussed in class

Levels of Production
Read 11.5 discussed in class
 PRODUCTION LEVELS

1. Subsistence Production
This is the production of goods to satisfy one’s own personal needs. E.g. kitchen garden, sewing
one’s own clothing etc.
Benefits
 It saves money
 One of a kind items are created
 Creativity can be explored

2. Domestic Production
The production of good/services for the local market
Benefits
 Use of local inputs e.g. labour, capital, raw materials etc.
 Provision of jobs
 Reduces imports
 Reduces the use of foreign exchange
 Economy may become self-sufficient

3. Surplus and export

The production of goods above what is needed to supply domestic needs. The surplus is sold on
the international market.
Benefits
 Foreign exchange earned
 The development of an external market
 Jobs
 Can improve Balance of Trade and current account of Balance of Payment
 COTTAGE INDUSTRIES

These are industries which are usually carried out in the home. They usually require some form
of skill in order to manufacture goods. These industries are very important to rural areas as
they provide income, employment and provide goods and services which may only have been
available in the town which may be far away.

Characteristics

1. Work mainly carried out manually

2. Home based

3. Business carried out on a small scale.

4. Use of local raw materials.

5. Family members provide labour and in some cases help is hired.

Functions of small businesses

1. Create employment.
2. Provide services that large firms are not willing to produce.
3. Niche markets.

Advantages of small businesses:

1. Generate employment: incomes especially in rural areas and economically depressed

areas.
2. Increase competition for larger firms.
3. Introduce new products and ideas (for example, event planning).

Disadvantages of small businesses:

1. the business lacks expertise in certain areas
2. owners find it difficult sourcing finance from financial institutions
3. limited ability to service customers due to unavailable resources

LARGE SCALE PRODUCTION

Advantages
1. They find it easier to raise large sums of capital

2. More capital is available for

 Advertising
 R&D
 Purchasing labour saving machinery
 Employing specialist personnel
3. Mass production allows for the possibilities of specialisation (division of labour)

4. Special prices and discounts can be obtained when buying in bulk

5. Mass production may lead to a reduction in production cost (economies of scale)

Disadvantages
1. Standardisation of products can lead to a reduction of choice

2. The union may become a problem for the firm in terms of wages/strikes etc.

3. Mass production may cause boredom in workers and thus reduced quality

4. It may become too complex to manage

Economies of Scale
This is the reduction in unit(average) costs of producing a product in proportion to the increase
in the size of operation of the firm. There are two types of economies of scale:

 Internal
 External
Internal Economies of Scale

These are those which are at the level of the individual plant or as a result of how the firm is
organised. They include:

 Technical Economies of Scale- The use of equipment to its full capacity which will
increase output.
 Financial Economies of Scale- Large firms can acquire capital (assets or money)easier
than small firms because borrowing is easier than small ones which can then be used for
expansion of operations.
 Marketing Economies of Scale- Buying raw materials in bulk attracts discounts, thus
reducing cost. This leads to cheaper production and overall unit cost.
 Managerial Economies of Scale- This involves the use of division of labour, specialists
can be hired for greater organisation and control of operations. This leads to increase in
the efficiency of operations. The division of the firm into various departments can also
lead to economies of scale unlike the sole trader who has to accomplish all tasks on
his/her own.
 Risk-bearing Economies of Scale- A large firm can spread its risk by selling more than
one type of good. When one sells slowly, the other can pick up the slack.
 External Economies of Scale
These are achieved as a result of the location of the firm. They include:

 A supply of skilled labour may be located in the area

 The good reputation
 Similar firms which are located close together can pool efforts in R & D
 As the firm expands, more supporting companies may grow up in the surrounding areas
helping to reduce cost. E.g. banks, cleaning companies, catering services etc.
Diseconomies of Scale
A firm cannot continue to grow infinitely. At some point in the expansion, increasing costs will
outweigh the output. This is known as diseconomy of scale. Examples of such are:

 Increased managerial costs

 Problems with the control and flow of information
 Inability to adapt to change quickly
 Breakdown in communication between staff and management
 Poor quality products
 Lack of relationship with customers
 Greater government scrutiny
 Increase in waste and pollution
 Standardised products(mass production) limits choice

Law of Variable Proportion

This law, also known as the law of diminishing returns, states that as a firm continues to add
variable factors (e.g. labour) to fixed factors, initially there will be an increase in production per
person. Eventually, the addition variable factors will result in less output per person(law of
diminishing returns). Therefore it can be said that initially production will increase, peak and
then decline.
LINKAGE INDUSTRIES
Industries which are dependent on another’s output to produce goods and services. E.g. the
rum distillery is dependent on the sugar industry. Linkage may be:

 Backward

 Forward

Importance of Linkage Industries

1. Employment
2. Foreign Exchange earner
3. Self-sufficiency
4. Use of local resources
5. Close proximity between industries can reduce costs e.g. transportation
6. Reduction of imports
7. Increase in investment
8. Knowledge can be shared

Problems
1. Limited raw materials
2. Access to foreign market is not guaranteed
3. Shortage of capital

FACTORS INFLUENCING LOCATION OF INDUSTRIES

1. Geographical 2. Availability of raw materials and supplies
3. Infrastructure 4. Power
5. Water 6. Transport
7. Health Facilities 8. Labour supply
9. Governmental Regulations
 GROWTH OF BUSINESS AND ITS EFFECTS

How Firms Grow

1. Expanding their markets
2. Creating new products
3. Merging with another firm
4. Takeover

Why Firms Grow

1. To reduce cost & achieve economies of scale
2. To increase profits
3. To achieve greater security

Effects of Growth
In any organisation growth will have an effect on the following

1. Organisational structure
It may become more complex, affecting the chain of command and the span of control of
individuals. New departments may also be created. There is also implications for the increase in
the amount of communication within the firm. Authority may now be delegated among a greater
number of personnel whereas one or two persons may have held it.

2. Capital
More money is now required to finance operations. E.g. buying equipment, paying workers, raw
materials etc. In order to finance its operations the firm may now have to increase its borrowing
or issues shares where possible.

3. Labour
An increase in the number of workers usually occurs but the extent to which is does may depend
on if the firm is labour or capital intensive. There may also be division of labour/specialisation
which increases output. Specialists may also be hired.
4. Potential for export
As production increases and the local market is being satisfied, surplus production may be
exported as a market is established.

5. Scale of production
This will increase as long as inputs have increased and are being used efficiently. Various
economies of scale can occur as production expands

6. Use of Technology
There will be greater used of technology as long as it will lead to reductions in cost and increases
in output. In turn it may cause a reduction in labour

CAPITAL INTENSIVE vs LABOUR INTENSIVE PRODUCTION

Capital intensive industries are those which use more machines than humans in the production
process e.g. automobile manufacturing. This method mainly operates in developed countries
which have access to the money to purchase equipment. The quality of products can be
standardised, output in usually greater and fewer people are employed.

Labour intensive industries use large pools of human and animal labour e.g. garment making.
Employment is generated and the wage bill tend to be high. This method of production is found
mainly in developing countries.
N.B. In the Caribbean many jobs which were done manually are now seeing the
introduction of the use of machines e.g. in the past, sugar cane was cut by hand it is now cut in
many countries by the use of the combine harvesters which complete the job at a quicker rate. In
other areas such as pattern making and drafting, architecture, engineering etc., CAD (Computer
Aided Design) is becoming more common. It speeds up the process and improves on quality and
standardisation. CAI(Computer Aided Instruction) is also a tool where the computer is used for
the giving of instructions. It allows a person to move at their own pace, offering methods of
testing, feedbacks and remedial work until the learner understands.