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Chapter (5 ) Production (Factors of production)

Production
A process which involves converting resources into goods or services.
These goods and services are provided to satisfy the need and wants of people.
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Factors of production = Input = Resources = Capacity
The resources used to produce goods and services.
There are four factors of production, Land, Labour, Capital and Enterprise.

1)Land (L)
All of the natural resources
a) Renewable used up --- can be replaced by nature. Eg soil, water.
b) Non-renewable once they have been used they cannot be replaced. Eg. Crude Oil, gold

2)Labour (L)
human resources / workforce in the economy
The people used on production of goods and services.

3)Capital (K)
All of Artificial (man-made) resource
a) Fixed capital Eg factories, offices, machinery
b) Working capital or Circulating Capital -- eg inventory, money

4)Enterprise (Entrepreneurs) (E)

An individual who organizes the other factors of production (LLK) and to take risks their own
money in a business venture.

Entrepreneurs (characteristics)
1)Risk- takers – who take risk their own money in the business venture.
2)Organizers - organizing the other three factors of production (LLK)
3)Decision makers – who can decide what to sell and how to sell
4)Innovator - come up with a business idea (have creative thinking)
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Value added (Price of FG - Price of RM = Value added )
The difference between the selling price of a product or service and the cost of bought in
materials and components.

Price of FG - Price of RM = Value added

Woody Toy ($100) Wood ($10 ) = $90

How to added value (Ways)

1)Use high quality raw material and labour --- high skill --- gain high quality FG --- willing to
pay high price
2)Use luxury packing ---- can attract to customer
3)provide advertising ---- become branded ---- scene of status --- willing to pay high price
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Production ways
1)Labour- intensive production
Production method that make more use of labour relative to machinery.
Eg Textile factory

2)Capital- intensive production (machine intensive)

Production methods that make more use of machinery relative to labour.
Eg car factory
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Sector (Industry) (Production sector) (Stages of business activity)

1)Primary sector
Production involving the extraction of raw material from the earth
Eg mining and quarrying, fishing, forestry, Agriculture

2)Secondary sector (manufacturing sector)

Production involving the converting of raw materials into finished and semi-finished goods.
Eg Car production factory

3)Tertiary sector
Produce and supply of services in the economy.
Eg professional services (Accountancy firm), transport, financial services
(banking, Insurance), Advertising agencies.
Banking ---- can deposit as safe place (Extra money) / make loan and Overdraft (money deficit)
Insurance ---- secure from financial losses
Transport --- transportation service – cost of transport lower
Retail store -- selling the product
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Industrialization
The decline in primary sector and increase in secondary sector.

Deindustrialization
The decline in manufacturing (Secondary sector) and increase in tertiary sector.
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Industrialization (advantages)
1)Output increase --- GDP increase ---- SOL increase
2)Output increase --- Ex increase --- balance of payment surplus
3)Individual and firm’s income increase --- Tax revenue increase
4)Increase in value added products

Disadvantages
1)Pollution
2)Depletion
3)Increase in housing and social problem --- people move form countryside to towns
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Reasons for deindustrialization

1)Increase in income & SOL --- increase in spend on services rather than more goods. So,
Substantial growth in tourism, hotel and restaurant and decrease in Spending on physical goods
2)To access cheap labour ---- move to developing countries. So, increase in imported goods.
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Economic problem

Resources Individual needs and wants occur scarcity

Limited Unlimited needs to make choice

Opportunity cost

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Scarcity
The lack of sufficient product to fulfill the total wants of the population.
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Opportunity cost
The next best alternative given up by choosing another item.
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Division of labour and Specialisation

Division of labour
Division of labour is when the production process is split up (divided) into different tasks and
each worker performs one of these tasks.

Specialization
Occurs when people and business concentrate on what they are best at.
In business, the production of a limited range of goods.
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Advantages (for firms)
1)Increased in Productivity ---Repetitive job ---- skilled increased ---Increase efficiency and
Output/ productivity --- get EOS ---- Average cost decline --- reduce the price --- more
competitive.
2)Cost may be lower --- Simplified job (easy /simple) can assign to unskilled labour --- wages
decreased --- cost of production decreased ---- more profit

Disadvantages (for firms)

1)Demotivation of worker ----due to repetitive job ----- workers can become bored ---
demotivation --- increased in labour turnover and absenteeism.
2)production may be halted ---- If one worker is absent and no one else can do the job,
production might be stopped (halted)----- delay in production --- customer dissatisfaction

Recommendation
1)To improve motivation --- use motivator factors (job rotation / job enlargement)
2)In order to reduce Halted --- give training and education --- become multi-skilled --- can be
substitute with another --- can reduce delay production
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Methods of Production

1)Job production (one Production ----- one Product ) ( one off project)
Where a single product is made at a time.
Eg weeding dress

Advantages
1)Can charge high price ---- use high skilled worker ------ Quality is high ---- can charge high
selling price --- can get more profit.
2)Customer satisfaction --- individually made to the customer needs (produce tailored made
product ) --- satisfaction --- improve image and reputation
Skilled workers --- motivation increased.
Production is easy to organize.

Disadvantages
1)Labour cost high --- use specialist --- wages and salary high --- cost of production increased
---- profit lower
2)Production may be slow --- not suitable for close dead line program
3)give up EOS --- Expensive method of production --- need to raise the Price ---- less
competitive
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(II)Batch production (produce identical product) (eg shoe manufacturing company)
Where similar products are made in blocks or batches.
A certain number of one type of product is made, then a certain number of another product is
made.

Changes ---- over time needed as modified batches are produced.

Advantages (feature)
1)Specialization --- skilled increased --- increased Output --- Gain EOS --- cost per unit
(Average cost ) decreased --- can get more profit
2)Production is flexible ---- production can easily change from one product to another to meet
demand ---- customer satisfaction ----improved image and reputation

Disadvantages
1)Demotivation --- due to repetitive job --- demotivation --- Output decreased ---- cost per unit
increased
Careful planning and co-ordination is needed.
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(III)Flow production = Mass production ( repetitive flow of production )

Where large quantities of a product are produced in a continuous process.
Eg manufacture of soap

Advantages (feature)
1)gain EOS --- increase in Output / Productivity ---- decline in Average cost ---- P OR P
2)high quality ---- use Capital (machine) intensive method --- increased in quality of goods ----
customer satisfaction ---- improve image and reputation.

Disadvantages
1)Demotivation ---- Due to repetitive tasks ---- Motivation decreased --- Output decline
2)Set up cost increased --- Cost of machine high --- can face with financial difficulties
3)expensive ---- Production --- break / error --- high loss ---
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Process production
(eg. Oil refining, manufacture of soap)
A form of flow production where materials pass through a plant where a series of process are
carried out in order to change the product (FG)
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Method of production chosen might depend on: (factors to be consider)

1)Nature of the product

Eg
Construction industry job production
Farming batch production
Making of wedding dress job production
Newspaper / food / cement flow production

2)Size of the market ( + CH 3 )

Eg
Small (niche market) job or batch production
Large (mass market) flow production

3)Stage of development a business has reached (stage of Product life cycle) ( + CH 3)

Eg
Introduction stage job or batch production
Growth/ Maturity stage flow production

4)Technology
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Productivity

Productivity
Measure the amount of Output that can be produced with a given quantity of resources.

1)Productivity Quantity of Output ÷ Quantity of Input = xx

2)Labour productivity Quantity of Output ÷ No of workers = xx

Reasons to calculate labour productivity

1)To calculate wages / bonus
2)To see training requirement

Reasons ----- Low labour productivity

1)low skilled labour --- time taken to do – high / wastages high
2)demotivation of employee --- unhappy at job / boring
3)difficult in working practices

Ways to improve labour productivity (used in labour intensive)

1)Provide Training and Education --- increased in skilled --- increase in Output / Productivity
2)Encourage motivation ---- provide financial (eg bonus) and non-financial incentive
3)Improve working practices --- use division of labour and specialization --- job become simple
and easy -----quick to produce---- increased in Output/ Productivity

3)Capital productivity Quantity of Output ÷ Capital employed = xx

Ways to improve capital productivity (used in capital intensive)

New technology is introduced / use machines instead of people to do jobs
(labour saving machinery)

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Use of new machine (Capital intensive) effect on

(i)Business
Advantages
1)gain EOS (economics of sales) ---- More Output --- increase efficiency --- decline in average
cost ---- P or P
2)Improve quality ---- can charge high price or customer satisfaction --- word of mouth
advertisement --- more reliable for potential customers --- improve image and reputation
3)reduce wastage ---- cost decline ---- P OR P
Can provide better Consumer service

Disadvantages
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1)Cost of machine may be high --- can face with financial difficulties
2)Risk may be high ---- new machine / technology unfamiliar with employee --- can make costly
mistake – increased in cost
Many technologies will be changing

(ii) Employees
Advantages
1)Job easier ---- effort and tired decrease --- improve SOL
2)increased in motivation --- will provide Training ---more satisfaction and increased in wages
and salaries
3)Less Repetitive job --- less boring

Disadvantages
1)Unemployment high --- labour replaced with machine ---- lay off --- unemployment increased
2)more stress for employee --- Unhappy due to technology changes

(iii)Customers
Advantages
1)Price may be lower --- increased in output --- gain EOS --- average cost decline --- can reduce
price --- affordable for customers
2)Quantity may be higher --- increased in output --- more choice --- satisfaction
3)Quality may be higher --- improved SOL

Disadvantages
1) Price may be higher --- higher cost of machine --- need to raise price
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Others methods of improving productivity

I)Lean production
Techniques used by business to cut down on waste (loss/ reject) and so increase efficiency,
for eg by reducing the time it takes for a product to be developed and become available for sale

Methods
1)Kaizen
A Japanese term meaning continuous improvement through the elimination of waste.
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Advantages
1)Increase in skill --- continuous improvement ---- increased skill --- output increased ---
2)increase in quality --- satisfaction --- image improved
OR
can charge high price --- will to pay this high price
3)decreased in loss (wastages) --- decline cost -- - P or P

2)Just- in – time (JIT)

A production method that involves reducing or virtually elimination the need to hold stocks
of raw materials or unsold stocks of the finished product. Supplies arrive just at the time they are
needed.
( RM bought ----------- Factory (Production) -------------- FG deliver to customer )
Warehouse x Warehouse x

Advantages
1)cost of holding decline --- holding cost may be Warehousing , Insurance , Obsolescence ---
Out of date --- cost decline ---- P or P
2)quick --- quick delivery to customer --- satisfaction
3)reduce Opportunity cost --- investment in stock decline --- money can spend for other purpose
---- more efficient use of money

3)Cell production
The production line is divided into separate, self-contained units (cells), each making an
identifiable part of the finished product instead of having a flow or a mass production line.

Advantages
1)simple and easy --- repetitive ----- skilled increased / quicker
2)can appoint low skill labour --- cost of labour decline --- cost of production reduced --- P or P

II)Work study
A process which identifies the best possible way to carry out a task by looking closely at the
way a job is done.
Carried out by a Specialist engineer.

(III)Downsizing
Process of reducing capacity,
Ex:
laying off workers or closing unprofitable division

Advantages
1)Cost saving and increase profit --- increase profit --- reinvest for Profitable/ Efficient
2)A leaner --- decline in cost --- can reduce price --- more competitive operation
Profitable business not subsidizing unprofitable ones.
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IV)Relocation
To take advantage of cheaper resources (laid, labour, capital)
Eg lower rent, lower wages or lower transport cost

(V)Outsourcing (choose new supplier)

The contracting out of work to other business that might otherwise have been performed
within the organization
Eg
distribution operation, IT department.

Factors to be considered
1)Price --- Price should be lower --- cost decline --- more profit
2)Quality --- Quality should be higher --- customer satisfaction --- image improve
3)reliability – on time delivery --- if late delivery --- dissatisfaction --- damage image
4)Transport costs

Advantages
1)Price may be lower --- cost decline --- can get more profit
2)Quality may be higher --- expert (specialist) ---- quality high ---- satisfaction --- loyalty
3)reliability --- on time delivered --- satisfaction ---
4)Transport costs

Disadvantages
1)Price may be higher ---- cost increased ---- can get low profit
2)Quality may be lower --- customer dissatisfaction --- damage image
3)reliability --- not reliable --- late delivery ---- dissatisfaction
4)Transport costs

Quality

Quality
Produce goods and services meets customer satisfaction

Quality standard
The minimum acceptable level (standard) of production and service acceptable to customers.
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Ways (methods) to gain High Quality
1)Quality Control
Check --- Made after production
Job it was to take samples at regular intervals to check for error.
So, expensive method

Disadvantages
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1)Customer dissatisfaction --- inspection take place at end of the process so, not seen at the
beginning of the process and usually use sampling not every, so chance of poor-quality product
finding it way to the final consumer.
2)boring for inspectors --- due to repetitive job --- boring--- declined in motivation --- decreased
efficiency and increase – labour turnover and absenteeism.
3)Demotivation for employees --- workers and inspector are not link --- conflict occur ---
demotivation.
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2)Quality Assurance
Check ---- Made before production (check --- every stage of production)
The business will make sure quality standard are set and then it will apply these quality
standards throughout the business.
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3)Total Quality Management
The continuous improvement to products and process, by focusing on quality at each stage of
production.
TQM ---- zero defect policy / Right first-time policy

Features of TQM
Quality is the first thing that worker should take care of
Must be carefully check before production
Every department should be satisfied
Workers should pay attention to the quality.
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4)Quality cycle
groups of workers who meet regularly to discuss work related problems ----- team works,
continuous improvement.

High Quality (QA , QC )

Advantages (reason for important)
1)Improve image and reputation ---- high quality --- customer satisfaction --- word of mouth
advertising --- improve image and reputation
2) Can charge high selling price --- high quality --- become branded --- can charge high price
--- can get more profit

Disadvantages
1)RM Cost increased ----- use of high quality RM ---- cost of production increased ---- can get
less profit
2)Labour cost increased ---- use of high skilled labour ---- high w&s ---- cost of production
increased ---- need to raise the price ---- less competitive
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Inventory (Stock)

Inventory
Purchase of goods for resale which may be Raw material (RM) , Work in progress (WIP)
and Finished goods (FG) .
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Reasons for holding inventory by firm

1)Raw material ---- needs as input --- convert to FG

2)Work in progress--- parts finished goods (unfinished goods) --- to be completed
3)Finished goods ---- ready to sale to customers
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Factors to be consider the level of inventory
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1)Demand --- should has enough inventory --- to meet D --- satisfaction
2)Cost of holding/ space --- if holding cost high --- can get lower profit
3)Opportunity cost --- capital tied up cost --- if inventory level high --- money cannot spend for
other purpose.
4)Nature of the products ---Perishable or durable --- can hold large Qty of inventory
Action of suppliers --- discount
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Holding high level of inventory --- Consequences

Advantages
1)Can meet customer demand --- ready to sell to customer --- not delay ---- customer
satisfaction --- image and reputation will be increase
2)Gain EOS (Purchasing EOS) --- buying in bulk ---- can get discount ---- cost lower --- can
reduce the price --- more competitive

Disadvantages (Problem)
1)Storage cost may be higher --- can get lower profit or need to raise the price --- less
competitive
2) Opportunity cost ---- Tied up cash in investing inventory --- working capital (financial)
difficulties.
3)Possibility of out of date or damage --- high cost --- P or P
More warehouse spaces
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Improve stock control
Using EOQ (Economic order Quantity)
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Lead time
The margin of time between the date when stock is obtained and the date when it is sold on.
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Holding cost may be

1)Warehousing
2)Insurance
3)Obsolescence --- out of date
Opportunities costs
Handling cost
Shrinkage cost

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Usages of low-quality Raw material (consequences)

(+) cheap --- decline in cost of production ---- can reduce the price
(-) cheap --- decline in quality of FG --- no: of complaint increase ---- damage the image and
reputation.
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