Form 5 Commerce Notes: Production

PRODUCTION

This is the process of making goods or rendering services for the satisfaction of human wants e.g. process of changing the goat skin into pairs of shoes.

Production can also defined as the creation of utility . there are several types of utility .these are :

FORM UTILITY

This is the utility which provided by the manufacturing or constructive industries which deals with changing the form of production .

TIME UTILITY

This is the utility which is provided by warehousing which deals with changing the time of consumption

PLACE UTILITY

This is the utility which provided by transport which deals with the changing of the place of consumption

POSSESSION UTILITY

This is the utility which is provided by trade which deals with changing the ownership of consumption

PURPOSE OF PRODUCTION

The main purpose of production is the satisfaction of human wants and needs through creation of utility of goods and services .

NEEDS – these include all goods and services which are necessary for human existence . needs of modern society and broadly grouped into five groups namely food ,accommodation ,clothes education and health care

WANTS – these include all goods and services that are required to supplement the needs of human being .

CHARACTERISTICS OF WANTS

1. WANTS ARE INSASTIABLE

This means wants can not be satisfied . .there are always new wants to satisfy .Man always cultivates for the new wants and he /she never satisfied at all i.e. wants plenty and infinite.

2. WANTS ARE HABITUAL.

Certain wants are created and sustained though a habit e.g. cigarettes smokes ,drinkers etc and in the many cases they depend on the financial position of a person.

3.WANTS ARE RE-CURRENT

Wants cannot be satisfied once and there fore all the keep on recurring quite often.

4.WANTS ARE COMPLEMENTARY

Satisfaction of single wants way make necessary to consumer a number of product e.g. hot drinks will require tea leaves or cocoa ,milk .sugar ,water and fuel to boil the component ink and pen electricity lamp and switches.

5.WANTS ARE COMPETITIVE

The are many product to satisfy a single want e.g. a want for the soft drink .there are cocacola ,pepsi etc hence he/she has to make selection from many goods.

PRODUCTION FLOW CHART

PRODUCTION COSTS/COSTS OF PRODUCTION

Production costs refer to the expenses or money used in the process of production. For example amount of money used to purchase raw materials, rent, salaries e.t.c.

TYPE OF PRODUCTION COST

Production costs are mainly categorized into two groups
(i) Fixed costs
(ii) Variable costs

1. FIXED COST

These are the costs which do not change as output changes. i.e do not vary without e.g. Rent, Interest, Salaries etc.
Fixed Cost = Total costs – Variable Cost
F.C = TC – V.C

2. VARIABLE COSTS
These are costs that vary directly with the output of the goods produced e.g wages of direct labour, raw materials, water, electricity etc.
Variables costs = Total costs – Fixed assets.
V.C = TC – F.C

3. TOTAL COSTS
These are overall expenses incurred in the production process i.e It is the sum of fixed costs and variable cost.
TC = F.C + V.C

4. AVERAGE COSTS
   These are costs per unit of output produced
   Average Costs =Total cost
   Output(Q)AC =Total cost
   Q5. MARGINAL COSTS
   These are additional costs incurred due to extra unit of output produced.
   Marginal Costs = Change in total cost
   Change in output
   MC = DTC
   Dq
   Where DTC = Change in Total costs
   Dq = Change in output6.EXPLICIT COSTS

   7.IMPLICIT COSTS

   8.ETC

   PRODUCTION STAGES / LEVELS OF PRODUCTION

There are three stages of production namely :

PRIMARY PRODUCTION

This is the first stage of production which deals with the extraction of raw materials from nature e.g. fishing ,mining agriculture etc often the output of the production is the input of secondary production .But the output of primary production can be used direct by the consumer e.g. all fruit ,vegetable etc.

SECONDARY PRODUCTION

This is the second stage of production which deals with processing raw materials extracted and collected by the primary production i.e. output of primary production e.g. manufacturing industries deals with it and constructive industries e.g. government manufacturer ,textile industries, bridge making .

TERTIARY PRODUCTION

Production process is incomplete in the second stage because do not reach to consumer .since we know the aim of production is to satisfy human wants and needs .

There are services such as transport , while selling , distribution and exchange and personal services such as medicines , security etc

METHOD OF PRODUCTION (TYPES OF PRODUCTION)

There are mainly two methods of production namely;

DIRECT PRODUCTION

This is the method of production where by goods and services are produced by an individual for his/ her own use .No surplus is obtained hence no exchange to take place .The method also known as SUBSTISTANCE PRODUCTION

INDIRECT PRODUCTION

This is a method of production where by goods and services are produced by an individual for the sake of exchange i.e.selling to other people .This method is also known as MARKET PRODUCTION.

MASS PRODUCTION AND THREE “S”

The mass production is the process of producing large amount of output by using fewer workers .

The term can be affected by the following factors

Simplification

This is the process of simplifying the manufactured products and keeps them in the functional .this means that the simplified product will be cheaper and customer will afford to buy if the previous was worn out.

Standardization

This is the process of putting the goods into the standard parts. This means the items produced can be used in the various alternative therefore this widen the markets for the product

Specialization

This is the process of concentrating the effort on a particular job . this means one will perform a work which he/she is suited to do best .therefore the productivity will tend to increase due to the fact that a person may concentrate in his/her activity

SPECIALIZATION AND DIVISION OF LABOUR

Specialization

Is the process where by a person would be required to concentrate on one activity/ job in which has the best skills or can do better.

.

Division of labour

Was defined by E.THOMAS that , it is an arrangement of labour power in such a way that maximize the amount and quantity of output.

ADVANTAGES OF SPECIALIZATION

• time and energy saving

Since a person concentrate on his/her field then the time which will be used for switching from one job to another will be saved as also energy will do the same.

• increase production

Different people with their professional are given their field , the production of output will increase because labourers have different skills and knowledge.

• degree of choice

People are able to choose their field because in the specialization, a person is given a work/job which he/she can do best

• development skills

Having to do the same work repeatedly , a person may be becomes highly skilled in his field by knowing where the mistake was and where it is ,people become qualified totally in their works.

• Inventions and in
  novations are encouraged in production process due to the use of machines hence high quality output is produced.
• Avoids boredom in the process of production since labourers concentrate only in activities where they have the best skills

DISADVANTAGES OF SPECIALIZATION

• Boredom – this is due to doing the same task again and again hence monotonous
• Unemployment- this is due to use of machines in production process
• High cost of buying machinery-
• Limited form of production- this due to the factor that a person concentrates on one production activity
• Loss of craftsmanship of natural resources due to the use of machines

FACTORS OF PRODUCTION

These are resources available to produce goods and services needed and wanted by the community .There are four factors of production

1. LAND

This includes not only land itself, but all that grown on it such as natural forest and any thing obtained from lakes ,sea ,rivers, oceans and canals .Land provide a space where factories are built and it is the ultimate source of all materials .

How land aids production?/ IMPORTANCE OF LAND

1. It provide space where productive activities can be located.
2. It provides raw materials and other commodities which can be used in production.
3. It is a form valuable natural resources.
4. It contains minerals which are very useful almost to all productive forces.
5. Provides agricultural commodities of all types which can be used as raw materials.

CHARACTERISTICS OF LAND

• Land is the gift of nature. Basically man has just found land for his/her use and has done nothing to bring it into existence.
• Land is limited in supply. Land strictly limited in supply but its supply can be conducted in absence of it i.e. industries are located on the land.
• Land is an immovable factor of production. Land can not move from one place to another .
• is subjected to the law of diminishing return. The law applied to the agricultural sector where when more factor of production (labour) are employed the output decreases.

PRODUCTION OF LAND

• Fertility

Improvement and development made on the land (agricultural techniques)

Situation is to population and market i.e. space for housing and production

Geographical situation (temperature zone , tropical or southern and northern hemisphere and desert.)

• Nature of surface of land . This means whether mountaineers or low and high land.

2. LABOUR

These are all human efforts mentally and physically which engaged in production

but not that labour is human effort ,but all human effort is not labour because labour must be aimed at production and paid for . thus if person plays football for his own pleasure his effort would not be called labour but if he in he works in the factory or otherwise contributing effort to any meaning of labour activities of person engaged in the giving direct services also termed as labour .

CHARACTERISTICS OF LABOUR

1. 1.High mobility.Labourers are easily shift from one industries to another or from one geographical location to another as well as from one occupation to another.
2. its availability depend on the size and structure of the population.
3. it requires close supervision and human relation to increase its efficiency.
4. Labour differs on the level of ability and efficient.
5. Labour sells his services and not himself.
6. has feelings and emotion and likings

Labour is any human effort both physical and mental at production of goods and services. Labour is mainly classified into three categories as follows;

1. Skilled labour
2. Semi skilled labour
3. Un-skilled labour

What are the importance of labour in production?

1. Simplify production activities
2. Facilitate other factors of production
3. Reduce costs

PRODUCTIVITY OF LABOUR

Sometimes known as efficiency of labour which means the quantity and quality produced by the labour .if a labour produces the products of superior quality in large quantity at a specific time , labour is said to be efficient.

FACTORS AFFECTING LABOUR EFFICIENCY AND PRODUCTIVITY

• Working condition
• Means of production.ie labour intensive or capital intensive technique
• Peace of mind.
• Incentives.
• Altitudes of the workers torwards work.
• Degree of specialization and division of labor
• Efficiency of other factors of production ( especially entrepreneur)
• Education and training

MOBILITY OF LABOUR

This is the movement of labor from one place to another or from one occupation to another .

The mobility of labour has the following types.

• Geographical mobility

This is the movement of labor from one place to another the development of transport and communication services expiation of education and employment opportunities in the some areas have called the movement of labor from one area to another .

• Occupational mobility

This is the movement of labor from one occupation to another e .g. movement from agricultural sector to industrial sector the occupational mobility is due to the expansion of education which cause people shift from agricultural sector to industrial sector

Occupational mobility is further divided into two forms of labour mobility.

1. Horizontal mobility

This is the movement of labor from one firm to another at the same level e.g. moving from firm A to firm B where you will remain at the same level as account.

1. Vertical mobility

This is the movement of labor from low grade to the higher grade . the movement from accountant to the senior accountant is the vertical mobility of labor

BARRIERS TO THE MOBILITY LABOUR

1. a) GEOGRAPHICAL MOBILITY

• Monetary cost. moving a family with its possession can be expensive operation.
• Housing shortage.this is the common feature especially in the large town and cities . It is particularly a difficult problem in the cases of the rented accommodation.
• Social ties. many people do not need to live beyond their friend and relative and face the prospective of establishing social relationship in the strange town.
• Education.many families tend to be immobile a certain state of their children education.
• National and international immigration laws often acts as a constant.

OCCUPATIONAL MOBILITY

• Natural mobility. people differ in natural mobility and some occupation requires a high level of intelligence of a particular natural aptitude which is only possessed by a certain proportional of the population which could be a small proportional such as surgeons , physicians , mathematician designers etc
• Trainers.professions which demand a very long time of education and training e.g. doctor leads into groups of these profession being very small and you can not shift very easily from either job into those jobs which requires training.
• Ignorance of employment opportunities in different areas.
• limited skills of individuals hence failing to acquire jobs.
• changes in science and technology e.g. use of machines in production process.

POLICIES TO ASSIST MOBILITY OF LABOUR

Government should provide financial assistance in form of transport allowances and accommodation to enable people search jobs in distant areas.

Due to ignorance about the presence employment opportunities, then jobs should be advertised through different advertising media

ADVANTAGES OF MOBILITY OF LABOUR

• Higher employment level. Labor mobility helps to reduce un-employment because workers can move to various with place with employment opportunities.
• Higher wages. A worker move from one job to another for the sake of earning higher wages I.e. in the vertical mobility.
• Greater productivity and efficiency. This is when labour moves from low or pour working conditions places
• Job satisfaction. Labor mobility allows workers to choose jobs are interested and satisfied with. This may bring a peace of mind.
• International understanding. Geographical mobility of labour creates and strengthen ones conditional of international community understanding between different countries of the world .people of the different races , from various countries working together can become broad minded to the extent of forgetting their racial ,tribes ,religious differences.

CAPITAL

Capital refers to man made resources used to create for the goods and services .capital is a factor of production as well as a means of earning income. capital is the factor of production be cause it consist raw materials ,total machinery ,roads ,buildings works, etc. this actually renders production possible and more efficient

FUNCTIONS OF CAPITAL

• Increase standard or living of the people, by use of money capital to acquire basic needs.
• Increase production due to the use of capital goods like machinery or tractors.
• Provide production with capital.
• Provision of employment. investment of capital all sectors of economy e.g. agricultural industrial ,trade ,transport banking creates employment to numerous people.
• Makes specialization and division of labor possible.
• It also helps by( financial them) in the creating the auxiliary services like insurance , transport ,warehousing.

CHARACTERISTICS OF CAPITAL

• Its availability depends on the relative interest and profit obtained in the industries at a given point of a time.
• Its productivity depends on the level of technology , the deficiency of other factors and the extent to which , it put into use .
• Its mobile in the both senses ( as a factor of production and as a means of earning income) although some types of capital are extremely mobile e.g. ship yard ,railways network which are in geographical site.
• Capital is subjected to the law of increasing return the law refers to the landed of more economic working of the business when scale of production is enlarged .

3. ENTREPRENEURSHIP

This is defined as art and science managing business. It involves organizaing and coordinating all other factors of productions like land, labour in the process in productions. Organization

Entrepreneur

This is the is the person or group of people who undertakes the projects . He supplies the necessary money to arrange and pay the factors of production . From the proceeds of sale he pays for the use of the other factors of production and he balance constitute his profit.

FUNCTION OF AN ENTREPRENEUR

• To start the business .This means he initiation of the ideal of starting up the business
• To employ the factor of production i.e. land labour and capital. It means he is the one who assembles all factor of production .
• To produce product . he is the one who decides what to produce and how to produce.
• To sell the product produced . the product after being produced are sold to the dealer of final consumers.
• To reward factor used i.e. to pay rent, wages ,interest. This means after selling the products the factors are rewarded
• To bear responsibility of profit or loss .the entrepreneur bears all risk in the market.
• To control the business and make sure that the cost and wastage are minimized.

ROLES OF PROFIT IN BUSINESS
Profit making is essential in the business due to the following factors:

• Incentive.Profit is the a chief motivating factors in the business .it provides the necessary incentives to work hard and also services as a reward for risk bearing.
• Survival . Profit is essential for the cost of staying in the business and their risk..
• Growth and expansion. Profit ensure supply of capital for future innovation and expansion. It services as means of self-financing or pouching back profit. profit enable to attract new capital from shareholders and debenture.
• Prestige. a profit made concern enj
  oy goodwill in the society a loss making business shaved by every body in the society.
• Measure of efficiency. Profit is considered to be endorsed of success in the business it measures the efficiency and effectiveness of the business efforts . it serves as means of evaluating business performance

NATURE OF THE BUSINESS RISKS

Business is the full of un-certainties .there is chance of loss from days , goods produced anticipation of demand to the day they are sold and payment is received , goods may decrease in the value due to the following reasons .

• Physical deterioration or shrinkage
• A fall in the market value
• Natural and man made catastrophe e.g. earth quake , fire and bad debts.
• A business may not be able to sell all goods due to the competition thus there is element of rise at every stage of production

CHARACTERISTICS OF BUSINESS RISKS

• Uncertainty. Business arises due to the uncertainty about the future cause of event .there are several types of uncertainty but some are Man made uncertainties e.g. lockout theft , bad debts such accidents caused by human failure lead to loss and Natural uncertainties e.g. flood, famine, drought , earth quake hails storm etc can result in the loss
• Variability. The degree of risk varies with size and nature of the business. Big firm often involves a higher degree of risks. A degree of risks also varies with time .period and degree of competition . firm dealing in the fashion goods faces risks than a firm dealing in essential commodities
• Profit in the level of breaking risks. An entrepreneur is willing to take risks in the hope of getting profit. That is way there is risk , also there possibility gain .

CAUSES OF BUSINESS RISK

• Natural causes. causes events such as floods , drought ,famine ,earth quakes ,volcanic eruption ,lighting snow falls ,epidemic results in the heavy losses of properties and income , human beings have most no control over nature.
• Human causes. The human factors is the main causes of risk in the business negligence or carelessness on the part of employees may lead to serious accident involving loss of life or properties . dishonest of the part of employees and costumers may result in forgery misappropriation of cash ,theft of goods etc in efficient accident management is often a cause of loss in the business.
• economic causes. This refers to the change of economic condition due to the fluctuation in demand and price of product and trade cycle and other un foreseen changes in income may also create a business risk .
• technical causes. Technical changes and mechanical defects also results in the business risk . change in technology may make machines absolutely before their expected life .mechanical failure such as out burst of boiler, leakage of gas etc may lead to heavy loss of life and properties , assets used in the business may be depreciated due to the shrinkage , loss in weight , vaporization etc
• political causes Political disturbance such as fall in the government , civil war etc . may lead to the heavy loss of life and properties

TYPES OF GOODS PRODUCED IN PRODUCTION PROCESS

What are they?

1. Free goods: Are those things which are free by nature e.g. water, air, sun shine
2. Economic goods: Are those goods which are scarce and to obtain them human efforts is required e.g. machines etc
3. Consumer goods: Are those goods which are used directly by final consumers. They are either durable (long lasting) or perishable (take a short time to go bad)
4. Producer goods (capital): Are those goods which are used in the production process i.e. they are used to produce other goods like machines, spare parts etc
5. Perishable goods.Are goods which can easily go bad eg milk, fish, vegetable etc.
6. Demerit goods. Are goods which are harmfull to human lives.

DIVISION OF LABOR AND SPECIALIZATION IN PRODUCTION

Concept of division of labor

-This is separation of jobs, activities and processes so that each person or group of people concentrate on what on what they can best, leaving others to do the rest. In the end there will be exchanging with one another.

Types of specialization

-This happens when one concentrates on a particular task effectively leaving others to be alone by the rest. Specialization is categorized in the following forms

1. specialization Professional
2. Regional specialization
3. National specialization
4. Specialization process.
5. Specialization by commodities.

LOCATION AND LOCALIZATION OF A INDUSTRY

Factors to be considered:

1. Availability of raw materials:

A production center should be located near to the source of raw materials to avoid cost of transportation and others

1. Nearness to the market.

A production industry should be located in areas where the markets for the finished products is readily available

1. Nearness to the power and water supply.

Since most of production industries need electricity for the machines to operate and water for their smooth running then they should be located in areas where water and electricity power can be readily available

1. Availability of labor supply.

Production industries should be located in a place where labor is cheap and abundant (plenty)

1. Availability of transport and communication.

These facilities are essentials to transport raw materials and finished goods to different places. This includes good roads, communication network and other infrastructure

1. Site for expansion.

The location required should be large enough to allow for feature expansion when the firm grows naturally due to increased investment,

1. Government policy
2. Availability of other services

LOCALIZATION OF INDUSTRIES

-Is the concentration of industries in a particular area or region, in this case all industries are established in one particular town. For example textile industries, and sugar industries etc

Advantages of localization

1. It leads to the development of other basic infrastructure
2. It brings about employment opportunities
3. It leads to the development of new subsidiary industries
4. Reduces the cost of production for the localized industries

Disadvantages

1. It brings about regional imbalances
2. Economy becomes dependent on a localized area
3. Employment opportunities are limited to a particular type of labor
4. High cost of living

ECONOMIES OF SCALE IN PRODUCTION

What is it?

-These are the advantages which occurred to the firm because of producing on a large quantity (scale). In that case, larger scale operations will result to the reduction costs

Advantages of large scale enterprise/ Economies of Scale

1. It leads to specialization in better quality work
2. It offers facilities and fringe benefits which stimulates workers in better production
3. Better use of machines which increase production efficiency at minimum goals
4. Large scale can afford advertising which provides and maintain its scale hence increased revenues
5. Large scale firm also affords to research which is geared to its improvement and better quality products

Disadvantages of large scale enterprise/Dis-Economies of Scale

1. A firm needs to have a larger market so as to continue large scale production
2. It is often more difficult to control and manage the enterprise
3. The firm incurs the increase cost of production as a result of advertising staff welfare, offering discounts etc
4. They lack personal attention of the customers
5. Decisions take longer period to be implemented because of bureaucracy

COSTS OF PRODUCTION

What are they?

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1. Fixed costs
2. Variable costs

What is fixed cost?

-these are expenses which do not change (remain fixed) as the production change i.e. output change for example salaries

What is variable cost?

-these are expenses which change (vary) with the change of output e.g. cost of raw materials, electricity

NB:

1. Total cost; is the sum of total fixed cost and variable cost of production
2. Marginal cost; is the extra cost to be incurred for producing one extra output
3. Average cost; is the average of total variable and fixed costs of production
4. Opportunity cost; Is the alternative that has been foregone after making a certain choice due to scarcity of resources