The nature of

production
What is production?

• Production is the creation of goods and services which satisfy human

wants and needs and for which people are prepared to pay a price. Simply
stated, production takes place when inputs change to outputs.

• The act of producing; creation; manufacturing

• Basic or primary human needs include food, shelter, clothing and

transport; along with theses there are secondary (social) needs and tertiary
needs (achievement or self-esteem).
Levels of Production

• The levels of production basically describes

the manner in which wants, and needs are
satisfied.
Three (3) levels of production

Traditional Domestic or Surplus or

or local Export
subsistence production production
 TRADITIONAL OR
SUBSISTENCE PRODUCTION
• This is the lowest (basic) level of production. Subsistence productions refers to output
from the production process that is just enough for the survival, no more, no less such as
food, clothing and shelter. This amount of production is therefore not adequate to meet all
needs and wants of a family, community or a country. For example, subsistence farming
involves the production of crops to feed the family and for survival. Wealth is not created as
whatever is produced is consumed. This was mostly practiced by tribes
• An example of traditional production would be: members of a family that do
farming, fishing, and so on just to feed his/her family members. They do not
provide for persons who they are not related to.
Domestic or Local Production
• This is the level of production that uses local inputs such as: land, labour,
capital and enterprise. Domestic production refers to production that is more
than survival level. It provides output that is enough to satisfy domestic needs
and wants of the family and the country. Excess is not available for export.
However, production is adequate to supply local demand. The trading of goods
within the country and is very important because it enables a country to rely on
its own resources rather than import from other countries.
• An example of domestic production is a local
farmer who produces root crops like yam, potato,
and so on, but also citrus fruits and bananas for his
family and for his/her country as well.
Surplus or Export
• This level of production is adequate to supply local demand and for
export. This is over and above the domestic needs of a country and is a
feature of mature of developed economies. The needs of the family,
country and exports are satisfied. Large industries can produce large
quantities of output to satisfy local consumption and earn foreign
exchange from export, for example, the sugar and banana industries.
• An example of surplus production would be where an organization produces
goods for the country and its people as well as for exports.
Questions: (feedback)

1. Why do individuals produce goods or services?

2. What are the three (3) levels of production?
3. Explain EACH method of production and state who benefits from the product or
services provided with that economy.
4. Exit pass (1) thing learnt (1) question pending
Factors of Production
The factors of production are resources required for
the manufacturing for the different types of goods
or services in the attempt to make an economic
profit. They are said to be rewarded for the
contribution that they make towards production.
The term ‘factors of production’ refers to the
resources that are combined in the production
process to create goods and services.

These are four factors of production. Our
resources or factors of production can be
subdivided into:
Land or natural resources that are
used in the production of goods
and services;
Labor or human effort in
production;
Capital or manufactured (man-
made) resources, that are further
used to generate output to satisfy
consumer wants;
Entrepreneurship or enterprise-
an entrepreneur is the person who
takes the risk of organizing land,
labor and capital in order to
produce goods and services, with
the hope of making a profit.
 Land
This factor of production refers to the land itself
and its natural resources that it offers, including
the sea. It can therefore be referred to a free
gift of nature and is considered the most
important factor of production. Hence, without
land production would not be able to occur.
Land or natural
resources
Along with the earth’s surface, any natural resource below the earth or above it is
regarded as land. When land is used to produce goods and services, it becomes a
factor of production and must be paid for. The reward or payment made to use land
is called rent.
Land is therefore the free gift of nature and is considered the most important factor
of production, since production cannot take place without it. Land can further be
subdivided into renewable resources and non-renewable resources.
• What are renewable resources?
• Renewable resources are
resources that can be replaced
as quickly as it is used.
Continually replaced. Examples
are: trees, agriculture, forestry,
and so on.
• What are non-renewable
resources?
• Non-renewable resources
are resources that cannot
be replaced after they have
been used. Cannot be
replaced after being
consumed. Examples are;
bauxite, oil, coal and so on.
Examples of renewable and non-renewable resources

Renewable Non-renewable

Fertile land: use of fertilizer Oil

Fish (land): fish farming Asphalt (pitch)

Forest (land): reforestation Bauxite

Water (by nature, e.g., rainfall) Limestone

 • Land (natural resources) is regarded as
fixed in supply, with a few exceptions. If
we speak of land on which to erect a
The supply of land building, we may say that we could
reclaim parts of the sea or swamp land in
order to increase the supply of building
land. Similarly land in the form of
renewable resources (e.g., forestry, water,
and so on) can be increased in quantity by
scientific methods.
Labor
This factors of production refers to the
human inputs of work to produce the
goods and services. The power to
work; human effort of any kind that
can either be manual (working with
the hands such as carrying, cutting), or
mental (using the brain such as trading,
accounting).
 Labor
Labor may be defined as human effort of any kind. This
includes skilled, semi-skilled and unskilled, manual and non-
manual labor. An individual is considered as a unit of labor
only when he or she is employed, or willing and able to be
employed, in the production process. To use a human
element as a factor of production, labor, he or she must be
paid a wage or salary.
What are unskilled
labor?
There is no special ability required to perform tasks,
examples, men who carry blocks and buckets on
cement on a construction site. Examples are:
dishwashers, garbage men, shop keepers, and so
on.

An unskilled laborer is an individual whose task requires only limited

training and little or no ability, e.g., someone who digs trenches. Manual
laborer’s include construction workers, whereas a non-manual worker
may be for example, a clerk typist.
 • The ability and skills to
do a particular task is
only partially
What are semi-skilled
labor? developed. Examples
are; nurse’s aide
waiter/waitress, and so
on.
What are
skilled labor?
There is a special ability to do a
particular job. These skills are
developed through specialized
training. Examples are: carpenter,
plumber, electronics, and so on.

A skilled laborer is an individual who

has training and ability in a particular
field e.g., an auto mechanic or an
electrician.
 What are professional
labor?
• Those individuals with the highest level of
knowledge-based education and
managerial skills with a bachelor’s
degree or diploma. Examples are:
teachers, bank managers, and so on.

• Another category of highly skilled labor

consists of those in the professional class
such as bank managers, university
professors, lawyers, architects and very
senior supervisors. In this class of labor, 20
to 30 years of training and experience
set them apart from other forms of skilled
labor.
 The reward for labor is called wages.

Wages and the

supply of labor
The supply of labor depends naturally on
the number of workers available, the
number of hours of work offered for a
wage, and the length of the working
week.
The factors that influence the supply of
labor are:
1. The size and structure of a country’s labor force.
2. The number of individuals who are willing and able to work
3. The number of working hours offered, or the length of the
working week.
4. The number of women in the working population.
5. The opportunity to obtain education and training.
 Capital

Capital as a factor of production describes resources that are necessary

for the further production of consumer goods or services. A good with
the following features is considered to be capital:
1. It can be used in the production of other goods (this is what makes
it a factor of production).
2. It is man-made, in contrast to land or naturally occurring resources
such as geographical locations and minerals.
3. It is not used up immediately in the process of production.
Capital is usually denoted as machinery or tools which are used in
combination with labor for the purpose of making goods. There can be
fixed or circulating capital. The former relates to goods such as
buildings or machinery, while the latter refers to the stock of goods that
a firm has ready for use in the future.
 Capital goods and consumer goods

Capital goods are not wanted for their own use or satisfaction. By contrast,
consumer goods provide direct satisfaction, e.g., a motorcar, stove, washing
machine or sewing machine. If, however, these goods are used to provide a
paid service, they then become capital goods. Hence, the nature of the item
itself is not what makes it a capital good or a consumer good: it is the uses to
which it is put that will determine this.
 Types of capital
Capital may be divided into physical capital and social capital.

• 1. Physical capital consists of fixed and working capital.

• Fixed capital usually refers to capital which is long-lasting and which does not change its
form during the course of production, such as factories, oil rigs, snow cone machines,
tractors.
• Working capital is changed in the course of production, for example raw materials, plant
seeds, fertilizer, shoe leather, cotton.
• Financial capital refers to the money capital which the company uses to run its day-to-day
operations. Financial capital consists of loan capital and share capital. Financial capital may
also be considered as working capital.
Social Capital:

• Apart from private investment there is also public

investment. This takes the form of government expenditure
on factories, plant and machinery or on roads, bridges,
airports, port utilities and power supply. These are called
social capital. House building is also included in this category.
The role of capital in a country

• For investment to take place, it has to be

financed. One of the ways to finance expenditure
on capital is from savings in the bank, which are
loaned to entrepreneurs.
Financed affecting the volume of capital are:

• The rate of interest

• The expectations of the business sector
• The rate at which capital wears out (depreciation)
• The state of the economy-during a boom more investment takes place
• Government action-if lower taxes are imposed on profits, firms tend to use profits to invest
• The cost of capital in relation to labor, and whether capital can be substituted for labor
The entrepreneur

• Although land, labor and capital have traditionally been considered the
factors of production, economists have argued that without the entrepreneur
there is no one to organize them into a productive unit. Decisions on what,
how, for whom and where to produce are taken by the entrepreneur. The
entrepreneur links land, labor, capital and pays rent to land, wages to labor,
and interest to capital.
The functions of an entrepreneur are:
• To take risks by entering the marketplace in order to supply goods and
services
• To raise finance before production begins
• The employ, coordinate and reward the factors of production for their
resources
• To ensure that the factors or production are used in the correct proportion.