Classwork Series and Exercises {Economics – SS1}: Theory of Production

SS 1 Economics First Term Week 5

Topic– Theory of Production

Contents– Meaning of Production

                    Types of production

                    Types of goods

                    Importance of production

Meaning of Production

Production can be defined as an economic activities aimed at the creation of goods and services and the distribution of these to the final consumers for the satisfaction of human wants.

It can also be defined as the creation of utility. All goods and services produced must be able to give utility to the consumers. Productions include the creation of tangible goods such as books, houses, cars, radio, computers etc and services rendered by doctors, lawyers, teachers, mechanics etc. Production is set to be complete when goods and services get to the final consumer

Types of Production

Production is grouped into two major categories which are

1. Direct Production: This is the type of production in which an individual produces goods and services only for the family use or consumption. The goods produced are meant for the family use alone and not for sale.
2. Indirect Production: This is the type of production that is made for general consumption where goods and services are produced in large scale mainly for sales or exchange for other needs. Indirect production is sub divided into
3. Primary production: Primary production refers to the extraction of raw materials from their source; It is the process of extracting raw materials from their natural location like water, land and air. Examples of primary production are agriculture, fishing, mining etc.
4. Secondary Production: Secondary production involves the transformation or conversion of raw materials or semi finished goods into final forms that are acceptable to the consumers. Examples of secondary production are houses, cars, food, roads, cloths, shoes etc.

• Tertiary Production: This has to do with the provision of professional or commercial services to the people. It is the process by which the goods produced at the primary and secondary level are distributed to the final consumers. Those involve in this section of production are the wholesalers, retailers, police, teachers, doctors, etc.

Importance of Production

Production is important for the following reasons

1. It helps to improve the standard of living
2. Provision of employment opportunity
3. It makes goods and services available
4. It helps to increase export potentials
5. It increases the wealth of the people
6. It helps people to acquire special skills
7. It can lead to specialization

Factors of Production

The factors of production are what make production possible, they are referred to as components or resources which are combined together to produce goods and services. The following are the factors of production

1. LAND: Land is a free gift of nature; in economics land does not only refer to the surface of the earth but all other natural resources like river, forests, atmosphere etc.

Characteristics of land

1. Land is a free gift
2. Land is immobile

• The supply of land is fixed

1. Land has no cost of production
2. Land is heterogeneous
3. The reward for land is rent

• The supply of land is fixed
• Land varies

Importance of Land

1. Land is important for construction purpose
2. It is used for farming and livestock

• Land is used as collateral security

1. It is used for wild life purposes like conservation centre, e.g. game reserves, museums, zoos, national park etc.
2. Land, air, and bodies of water like oceans, lakes etc serves as a medium of transportation.
3. Land serves as social and recreational purpose like markets, stadium, schools etc.

• It is used for residential and industrial buildings
• Land is the source of minerals like gold, limestone, petroleum, tin, etc.

2. LABOR: Labor as a factor of production is defined as all forms of human efforts put into production. It is the mental and physical effort put in the process of production. The reward for labor as a factor of production is wages and salaries.

Types of Labor

1. Skilled labor: These are labors that make use of their mental effort in the production of goods and services. They are labors who have undergone some training in institution of higher learning. E.g. Accountants, doctors, engineers, lawyers etc.
2. Unskilled labor: These categories of labor require no or little formal education. They make use of their physical and energy in the production process; their jobs are referred to as brown collar job. They are employed ad guards, messengers, cleaners, etc.

Characteristics of Labor

1. Labor is human factor
2. They have feelings

• Labor is mobile

1. Labor has initiative
2. Labor requires motivation
3. Labor is not fixed

• Labor is perishable
• Labor controls other factors of production

1. Labor cannot be predicted

Importance of labor

1. Labor is important because it influences other factors of production
2. Labor provides the required skills and personnel necessary for the production

• Labor operates the machines and other factors of production

1. They engage directly into the production.
2. CAPITAL: Capital can be defined as the man made assets that is used in production, capital refers to the man-made wealth or goods used to produce other goods and service. Example of capital includes physical cash, cutlass, machines, buildings etc. The reward for capital is interest.

Types of Capital

1. Fixed capital: They include durable assets of a business that can last for a very long period of time; they do not change their form in the process of production. Examples are land, buildings, machinery etc.
2. Circulatory capital or working capital: These are capital that is used up in the process of running the business, they are goods that can easily change their form or used up in the process of production. E.g. fuel, materials etc.
3. Social capital: This is the form of capital or assets provided by the government that aid production. E.g. the provision of electricity, roads, water etc.
4. Current or liquid capital: This is the capital required for the day to day running of business e.g. money.

Importance of Capital

1. Capital boost efficiency
2. It facilitates production

• It helps to bring about quality production of goods

1. It increases the standard of living
2. It assists in the location of industry.
3. THE ENTREPRENEUR: This refers to the factor of production that co-ordinate or directs other factors of production (land, labor and capital) for the production of goods and services. The entrepreneur is the person who manages, control, organizes and directs the process of production. The reward for an entrepreneur is profit.

Characteristics of entrepreneur

• They make decision
• They provide capital
• Risk bearer
• Controls other factors of production.

Production Possibility Curve (PPC)

The production Possibility Curve refers to a graph or curve showing the possible combination of different commodities that can be produced in a given economy if the available productive resources are efficiently utilized. PPC is a graphical illustration of all the possible combinations of two or more types of commodities which a society can produce using a given quantity of resources.

Test and Exercise

• ———— is all economic activities aimed at the creation of goods and services and the distribution of these to the final consumers for the satisfaction of human wants. (a) Consumption (b) production (c) utility (d) specialization. ans (b)
• Production is not complete until goods and services gets to the (a) wholesalers (b) retailers (c) consumers (d) manufactures. ans (c)
• The capital used for the day to day running of an organization is (a) current capital (b) fixed capital (c) working capital (d) social capital. ans (a)
• One of the characteristics of a labor is (a) bear the risk (c) labor is fixed (c) labor is immobile (d) labor is human factor. ans (d)
• The reward for land as a factor of production is (a) rent (b) interest (c) profit (d) wages and salary. ans (a)