PRODUCTION, PRODUCTIVITY AND FACTORS OF PRODUCTION

 Production is the act of creating output, ie goods or services which have values and
contributes to the utility of individuals. The factors of production are the inputs in the
production process. The finished goods are the output. Input is the starting point and output is
the end point of the production process, and such an input-output relationship is called the
production function.

Productivity is the ratio of output to input in production. It is a measure of the efficiency of

production. It is related to the utilization or the use of resources to produce goods.

Factors of Production
1.   Land – also called Natural resources
2.   Labour – also called human resources
3.   Capital- also called Man-made resources (or non-human resources)
4.   Enterprise or Entrepreneurial Ability - also called Human resources

Land
Land as a natural resource does not mean simply the surface of the earth which can be used to
grow crops and includes forests, deserts and mountains; rather it includes what is above the
ground ie atmosphere and climatic conditions and what the land contains.  These include
minerals such as bauxite, iron, oil, gold, and diamond.  It also embraces sunshine, rainfall,
rivers, and sunshine.
Characteristics Of Land
The land is fixed in supply.  This means that it cannot be increased BUT the quality of the
soil can be improved by the use of fertilizers, drainage, land reclamation and reforestation.
The land is geographically immobile but can be occupationally mobile. This means that it
cannot be moved but we can change what we are using it for
There is no cost of production. This means it naturally exists as a gift of nature/ However, it
cost to use the land such as extracting minerals or preparing a site for a building
Labour
Labour is the mental and physical effort of man in the production process
The labour force is all those persons who have reached the age for work as stipulated by law
and who are either employed or unemployed.
The supply of labour is the availability of labour within the labour market which would also
include the number of hours they are willing to work at a particular time and at a specified
wage within a country or industry. The supply of labour is influenced by the size of the
population and the age distribution of the labour force. Mobility of labour is the willingness
of people to move to another place to work.
Types of Labour
Skilled- persons who have a special ability to do a particular task.  These skills may have
been developed through training or on the job (architect, doctor).
Semi-skilled- The ability to perform a task is only partially developed.  Workers need further
training to be competent (nurse aide, teacher assistant).
Unskilled- There is no special ability required to perform a task (watchmen, vendor).
 
Characteristics of Labour
Only the worker can sell his services in other words labour is inseparable from the labourer.
Labour services cannot be stored so it is perishable.
Labour is geographically and occupationally mobile.
Labour service is not homogenous. In other words, it differs in skills and ability and time
period.
Labour services can be enhanced by training and education.
Productivity of Labour
 This looks at how well people work or output per man hour. It also looks at how well
resources are used.
 The Benefits of Productivity
 Lower cost of goods/ more affordable
 Increasing productivity enables higher wages to be paid
 Leads to growth
 Scarce foreign exchange can be saved as local goods can be produced cheaper.
Factors that Influence Productivity of Labour
 Level of understanding of worker
 The health of the worker
 Mobility of labour
 Working conditions
 Nature of the job
 Technology available
 Benefits available
 Extent of Job security
 Type of on-the-job training
 Opportunities of upward mobility
 
 Division of Labour and Specialization

ADVANTAGES OF DIVISION OF LABOUR DISADVANTAGES OF DIVISON OF LABOUR

Workers become more experts in their jobs. Repeating a single task can become boring.
Jobs become simpler and easier to learn Greater use of machinery can cause unemployment.
Output per person increases. Slow workers may be unable to keep up with others.
Machinery and automation can be used. It is harder to change jobs since they are skilled in one
task only.

 
Migration is the movement of people from one area to another to work and live.
Types of Migration
Internal: movement from one geographical area within a country to another within the
country.
External: Moving from one country to reside in another.
A Person leaving his country to reside in another is called an emigrant. When the person
arrives in that country, he/she is an immigrant.

 
Capital
Capital is all the man-made resources to further the production process. The reward for
capital interests. This is because in order to purchase machinery or big capital equipment the
individual making the investment has to borrow. Therefore, when you borrow you have to
pay bait ck with interest.   

Capital goods are used to make other goods. Capital goods satisfy consumer needs indirectly.
Consumer goods are made for immediate consumption

Capital is that part of wealth which is not used for the purpose of consumption but is utilized
in process of production example tools and machinery, bullocks, seeds, and fertilizers

The purchase of capital goods is referred to as investment or capital formation.

The wear and tear of capital goods during the production process is called depreciation or
capital consumption. 

Classification Of Capital
Working capital is used up in the production process. It is capital for the day-to-day
operations of the business
Fixed capital or physical capital is long-lasting and does not change form during the
production process (factories, machinery).
Social Capital is infrastructure usually provided by the government (roads, hospitals).
Characteristics Of Capital
 The opportunity cost of producing capital goods is the consumer goods foregone.
 Capital accumulation has implications for the wealth of the nation and future production.
 Capital has the ability to be a substitute for labour and improve productivity
 Capital can work long hours
 Capital expertise if maintained in the machine and technology
 
Entrepreneurship
Entrepreneurs as decision-makers, risk bearers and organizers of all the factors of production
play a key role in the success of productive activities. It is the most important of all the
factors of production and it is the most mobile as well. The basic function of entrepreneurship
are the same in all industries

Production Sectors And Production In The Short Run And Long Run
Primary Sector Extracts Raw Materials
The primary sector of the economy can be classified as the "extractive" industry. These
include the industries that produce or extract raw materials. Farmers are an example of
primary sector workers, as food items are collected as raw materials, such as wheat and milk,
and are taken from the farm and made into other products such as bread and cheese. Other
industries include mining, such as coal, iron ore or oil, which extract the raw materials from
the ground which will be converted into other useful items. In traditional economies, the
primary sector usually represents the largest sector of employment.

Secondary Sector Manufactures and Assembles Goods

The secondary sector of the economy is comprised of the manufacturing industries which
take raw materials and produce products. For example, steel used to manufacture cars.
Carpenters take wood and make homes, furniture and cabinetry. Not all manufacturing
companies manufacture a complete product. Semi-manufacturing companies produce parts to
be used in other products that have several stages of production, such as automobiles. The
secondary sector is usually strongest in so-called "transitional" economies that are changing
from traditional to market economies.

Tertiary Sector Refers to Commercial Services

The tertiary sector of the economy is the service industry. Service companies do not provide a
physical goods like the primary or secondary sectors, but they still provide value. For
example, banks, insurance and the police all are examples of the service industry. Industries
included in the primary or secondary sectors will typically have employees who provide
tertiary services such as advertising, accountants and warehousing employees. The tertiary
sector is usually strongest in advanced market economies.

Understanding the Chain of Production

The sectors all work together to create an economic chain of production. The primary sector
gathers the raw materials, the secondary sector puts the raw materials to use, and the tertiary
sector sells and supports the activities of the other two. Many companies will have
components of all three sectors, such as a dairy farmer who makes cheese and ice cream and
distributes the products to stores for sale. Other companies may strictly focus on one
particular aspect, such as manufacturing a particular kind of product only. Together these
sectors make up the backbone of the modern economy.

 
 

Primary Sector Secondary Sector Tertiary Sector

It is known as the It is known as the It is known as the service
agricultural and allied sector manufacturing sector sector
services
This sector provides raw This sector transforms one The tertiary sector provides
materials for goods and good into another by useful services for the
services creating more utility from it primary and secondary
sectors
The primary sector is uses The secondary sector is This sector is well
traditional techniques organized and uses better organized and uses modern-
methods of production day logistics techniques to
perform its functions
Activities in this sector It includes manufacturing Banking, insurance trade
consist of agriculture, units, small scale units, large and communications come
forestry and mining firms and multinational under this sector
corporations
In most developing nations The employment rate is in This sector’s employment
this sector is where a large equilibrium as a specialized share has increased as the
section of the workforce is set of skills is required to country becomes more
employed, in comparison to find employment in this developed 
developed nations sector
 

Economic Systems
The Economic System is the way in which a nation or country plans to utilize its resources in
order to benefit its nation/ the way scarce resources are organized for the production and
distribution of goods and services within an economy.
Types of Economic Systems
 Traditional/Subsistence
 Command/Planned/Socialist
 Free Market/Market/Capitalist
 Mixed Economic System
  Traditional Economic System
The traditional economy is the most ancient type of economy in the world. Small pockets of
communities in the world still function under a traditional economic system. Man’s needs and
wants are satisfied through direct production, which is through man’s production of goods
and services.  These economies do not use money so trade is limited to barter within the
community.  Individuals spend a lot of time fishing, hunting and farming.  These economies
are closed, they have little contact with the rest of the world. These areas tend to exist in rural
areas of many countries.

Features of a Subsistence Economy

 This is a self-sufficient economy.  Man’s needs and wants are satisfied through direct
production.
 Man produces goods and services for himself and his family. 
 These economies do not use money so trade is limited to barter within the community. 
 Individuals spend a lot of time fishing, hunting and farming. 
 Ownership of scarce resources is based on what is passed on to you by your family.
 There is no formal government
 Private individuals own and allocate resources. 

Advantage: 

 There is less destruction to the environment because many of these traditional economies
farm and positively use the land. 
 Limited number of goods can be exchanged (therefore labourers does not have to
overwork themselves)

Disadvantage: 

 Unequal exchange as the value of some goods did not match the value of others. 

 Inadequate use of skills

Command/Planned/Controlled Economic System

In a command economic system, production is concentrated in the hands of the state.  The
state owns all economic resources and production decisions are made by the state.  They
decide how what and for whom to produce.  Cuba, China and North Korea, Russia are
examples of this system.  Before the 1990’s the Soviet Union was.  This type of economy
was the core of the communist philosophy. There is no private sector.

Advantages of Command Economic Systems

 In a command economy, it is theoretically possible for the government to create enough
jobs and provide goods and services at an affordable rate.
 The government can focus on the good of society rather than the individual. This focus
could lead to more efficient use of resources.
 Workers tend to work harder since they are working for themselves and their country.
 Incomes are more evenly distributed.
 
Disadvantages of Command Economic Systems
 However, in reality, most command economies often have overproduction or
underproduction as the state is unable to predict demand accurately. Rationing is a
common feature of this economy
 There is a lack of innovation since there is no need to take any risk and no freedom of
choice for consumers.
 People cannot influence the production of goods and services.
 All profits go to the state.

Free Market Economic System

In this economy, private individuals allocate resources as they own these resources.  Private
individuals own and allocate resources.  Demand and supply usually determine the price of
goods and services.  Producers are attracted by high prices and will produce more when the
price is high.  Fall in demand results in some firms leaving the market.  Examples:  Hong
Kong and the USA, Canada are the closest to the theoretical concept of the market economy. 

Features of the Free Market Economy

 In a free-market economy, firms and households act in self-interest to determine how

resources get allocated, what goods get produced and who buys the goods.
 There is limited government intervention in a pure market economy (“laissez-faire“).
 In this type of economy, there is a separation between the government and the market.
This separation prevents the government from becoming too powerful and keeps its
interests aligned with that of the markets.
 Producers are motivated by profits

Advantages of a Free Market Economy

 Consumers pay the highest price they want to, and businesses only produce profitable
goods and services. There is a lot of incentive for entrepreneurship. (That means
innovation and economic growth).
 Prices are determined by demand and supply. 

 This competition for resources leads to the most efficient use of the factors of production
since businesses are very competitive.  Firms are free to produce certain goods, thus
competition forces prices down

 There is an incentive for constant innovation as companies compete to provide better

products for consumers.
 
Disadvantages of a Free Market Economy
 There is a lack of focus on societal benefit which leads to higher income inequality.
 Since the market is driven solely by self-interest, economic needs have a priority over
social and human needs like providing healthcare for the poor. Consumers can also be
exploited by monopolies.
 Firms can influence prices by altering their output.
 Profit motive drives the economy which leads to unequal distribution of wealth.

Mixed Economic System

A mixed economy is a combination of different types of economic systems. This economic
system is a cross between a market economy and a command economy. In the most common
types of mixed economies, the market is more or less free of government ownership except
for a few key areas like transportation or sensitive industries like defence and railroad.
However, the government is also usually involved in the regulation of private businesses. The
idea behind a mixed economy was to use the best of both worlds – incorporate policies that
are socialist and capitalist. To a certain extent, most countries have a mixed economic
system. Both private individuals and the government make economic decisions as to what to
 produce, how to produce and for whom to produce. Most countries in the English-speaking
Caribbean have this system.
 
Advantages of Mixed Economies
 The government can intervene to correct market failures. For example, most governments
will come in and break up large companies if they abuse monopoly power. Another
example could be the taxation of harmful products like cigarettes to reduce a negative
externality of consumption.
 Governments can create safety net programs like healthcare or social security.
 In a mixed economy, governments can use taxation policies to redistribute income and
reduce inequality.

Disadvantages of Mixed Economies

 There are criticisms from both sides arguing that sometimes there is too much
government intervention, and sometimes there isn’t enough.
 A common problem is that state-run industries are often subsidized by the government
and run into large debts because they are uncompetitive. 

Comparing Economic Systems

Traditional Economy  Mixed Economy

Who makes Individual members of traditional society  Combination of the state (government) and
economic private consumers and suppliers
decisions? 

What/who Smallholders who focus on producing Combination of the state and the market
determines subsistence crops and implements
what will be
produced?

How are Using simple subsistence techniques Combination of state-run and private
goods business
produced?

How are Smallholders get what they produce themselves Some goods and services allocated by the
goods and barter some items state (e.g., healthcare and public
allocated in education), and other goods and services
society? bought privately

Planned Economy Capitalist Economy

Who makes economic Mainly government Consumers and producers 
decisions?  planners

What/who determines what Government plans The markets (demand and supply)
will be produced?

How are goods produced? Mainly by state-run Private companies seeking profits
industries 

How are goods allocated in By the state Individuals choose what to buy with
society? their incomes

Types of Organizations in the Free Market Economy

The Sole Trader

Advantages of Sole Traders:
 Easy to set up. With less start-up capital, a sole trader business can enter into
operation almost immediately.
 Sole proprietor is the sole owner of the business, hence they take all the profits
generated by the business. 

 Disadvantages of A Sole Trader:

 Being a sole trader includes carrying out all the responsibilities and work of the
business. This can be time-consuming and stressful for the owner. 

 It is difficult to raise capital for starting up a sole trader business hence this type of
business has limited capital.

 Lacks legal protection of limited liability. This means that if the company loses a
lawsuit or becomes indebted if what is invested cannot compensate the lawsuit then
the owner person assets will have to be liquidated to pay off the lawsuit or debt.

Partnerships

Advantages of Partnership:
 Owners share the workload including working hours making it less stressful for partners. 

 Because there are more than one partner, each will bring more skills, ideas and capital to
the business.

Disadvantages of Partnership:
 Lacks legal protection of limited liability. This means that if the company loses a lawsuit
if what is invested cannot compensate the lawsuit then the owner person assets will have
to be liquidated to pay off the lawsuit.

 Owners of the partnership are liable for debts of their business and may have to sell
personal possession to meet them.

 Capital is limited to the number of partners in the business. 

Public companies & Private companies

Advantages of Both Private and Public Companies

 Companies have limited liability. Only what is invested in the company can be used to
pay the debt. 

 Have access to unlimited capital. However, public companies have more access than
private companies.

 Public companies enjoy the benefits of being listed on the stock exchange: tax incentives
for junior market listed public companies.

 Able to raise capital quickly

Disadvantages of Both Private and Public Companies:

 A lot of bureaucracy and paperwork is involved in setting up companies.

 Must have proper record keeping as mandated by law, this can become burdensome and
stressful.

 Share can be bought up by individuals and groups who want to take over the business.
Thus, the original owner may lose control of their business.

Cooperatives
Advantages of Co-operatives
 Since the members are also owners, the have a financial interest in the success of the
cooperative which sways them toward giving it their full support and patronage.

 Co-operators benefit from sharing responsibilities and from the pooling of money and
other resources. 

 Owners share recompense/rewards and losses

Disadvantages of Co-operatives
 There are a limited number of lenders who do co-op loans, and your loan options are
restrictive. 

 Owners may repay loans with high-interest rates.

The Cost of Production

Total Fixed Cost The Sum of all of the different types of fixed costs at different
outputs
Total Variable Cost The sum of all of the variable costs at different outputs
Total Cost The sum of total fixed cost and total variable cost at different
outputs
Average Fixed Cost The total fixed cost divided by the level of output
Average Variable Total variable cost divided by the level of output
Cost
Average Total Cost The total cost divided by the level of output

Table and Curves

Output Fixed Variable Total Average Average Average
per week cost ($) Cost ($) Cost Fixed cost Variable cost Total cost
($) ($) ($) ($)
0 200 0 200 - - -
5 200 25 225 40 5 45
10 200 40 240 20 4 24
 15 200 50 250 13.3 3.3 16.7
20 200 70 270 10 3.5 13.5
25 200 90 290 8 3.6 11.6
30 200 125 325 6.7 4.1 10.8
35 200 210 410 5.7 6 11.7

Total Cost Curve

Average Total Cost Curve