THE THEORY OF PRODUCTION

BED 114 (INTRODUCTION TO ECONOMICS)

MEANING OF PRODUCTION

Production may be defined as any activity involving the transformation of

raw materials into finished goods and the distribution and provision of goods

and services in order to satisfy human wants. From this definition, we can

establish that production involves creation of physical goods such as cars,

electronic products, etc and the provision of services such as services

rendered by medical doctors, banks, lecturers etc. it can equally be said that

production is the creation of utility the ability of any commodity or service

to satisfy human wants. Production is complete only when the goods and

service produced reach the final consumers or users.

Types of Good Produced

There are basically two types of goods and services produced to satisfy

human wants they are

a. Consumer goods

b. Capital goods

a. Consumer goods: - There are goods and services that can satisfy

consumers’ immediate wants. No further process(s) of production

is/are needed for their use by the consumer. Examples are soft drinks,

bread, biro, television. Consumer services involve service of a

teacher, lawyer, barber etc.

b. Capital goods:- Capital goods are meant for the production of further

goods and services. Example are machines used for the production of

goods cars and other vehicles used for production activities

Stages of production

Production can be described based on the source of raw material and the

stage of production activity. Economic activities involved in production are

so vast that production is divided into three broad stages primary production,

secondary production and tertiary production. They are discussed one after

the other.

i. Primary Production:- This involves all productive activities associated

with the extraction of raw materials from the soil or the sea. At this first

stage of production, the goods and services produced are known as raw

materials. Activities in this sector are said to be in the extracted industry.

Examples of these activities are farming fishing, mining of petroleum

resources and other minerals.

ii. Secondary Production:- At this stage of production, the raw materials

extracted from the soil and sea are processed and transformed into

finished goods or into a form that could still be used for further

production of goods and services. At this secondary stage, utility is

added to the raw materials of the primary production. Manufacturing and

constructive industries are involved in secondary production. Activities

at this stage include milling textile manufacturing and bewaring.

iii. Tertiary Production:- as noted earlier production is never complete until

the goods and services get to the final consumer. This is the stage where

all the goods and services production in the two stages above get to those

who need them. This stage completes the production process. Activities

at the tertiary stage include distribution, communication, banking,

insurance, teaching etc.

TYPES OF PRODUCTION

There are basically two types of production viz direct production and

indirect production

a. Direct production:- This is the production that takes places when a

family unit produces goods and services manly to satisfy all its needs

and not for sale. Direct production is common in a subsistence

economy where subsistence farming is predominant. Production here,

is not for exchange but for consumption by the producers and their

families

b. Indirect Production:- This form of production involves the production

of goods and services for exchange so as to use the money realised to

satisfy the producer’s other wants. In every modern society, nobody

can satisfy all his needs directly with his own goods and services.

There is a lot of inter – dependency. People satisfy their wants

indirectly by exchanging their surplus outputs with other producers or

selling their goods and services and using the proceeds to satisfy their

numerous wants.

Factors of Production

These are the resources both tangible and intangible that are used to produce

goods and service. They are otherwise known as agents or means of

production. They are all the factor inputs into production. There are four

factors or agents of production – land, labour, capital and entrepreneur. We

shall discuss them in detail.

a. Land

Land as a factor of production is a free gift of nature and it is fixed in

nature. It is the oldest factor of production because it has been in

existence before man. Land does not include only hard surface of the

earth but all other free gifts of nature like water, forest, mineral resource

etc. the reward of land is rent.

Attributes of Land

The following are the characteristics of lands these characteristics make

land different from other factor of production.

1. The supply of land is fixed in nature. Man cannot increase the volume

of natural resources like gold, diamonds, crude oil etc. in the short run

however; the quality or fertility of land can be increased by adding

fertilizers to it.

2. Land cannot easily be moved from one geographical location to

another

3. The reward for land is rent.

4. Land is relatively indestructible

5. The quality of land varies from one place to another for example a

plot of land in Lekki is costlier that a plot of land in Epe and a plot is

costlier than in Ijebu – Ode.

6. Land is a free gift of nature. It has no cost of production. Its

availability costs human beings nothing. The quality of land can only

be increased by the efforts of human beings.

7. Land is subjected of the land of diminishing returns

THE LAW OF DIMINISHING RETURNS

The law of diminishing returns states that @as more and were variable

factors of production such as capital and labour are combined with the fixed

factor of production such as land., production will increase up to a certain

point when decrease in total output will start as a result of continues addition

of variable factors while the fixed factor remained constant’ for instance

where a piece of land is used for agriculture at the initial stage, the continues

additions of workers and seeds (variable factors) will increase the output up

to a certain point when decrease in output will set in because of the

continuous increase in variable factors and land (fixed factor) remands

constant. The above explanation can be the illustrated in the table below.

Fixed factor Variable

factor

Total output Average

output

Marginal

output

1

1

1

1

1

1

1

2

3

4

5

6

25

60

120

220

190

180

25

30

40

55

38

30

-

35

60

70

30

10

From the above table, we can see that the law of diminishing returns sets in

as the total output, Average output and marginal output of products start

decreasing at appoint where 5 – 6 variable factors were added. There has

been on increasing returns in the early stages because of increasing amount

of the variable factor from 1 – 4.

Labour

Labour is the physical and mental efforts of man used in the production of

goods and services. Unlike land, labour is a variable factor of production.

Labour involves human beings who use their management, technical and

intellectual skills in the production of goods and service. The reward of

labour is wages. There are different types of labour varying form skilled,

semi – skilled and unskilled labour.

i. Skilled labour:- The labourer here, is required to have undergone

some kind of training or apprenticeship before he can be

employed. This is because skilled labour involves the use of

mental efforts in carrying out production activities. Workers in this

category of labour include engineers, accountants, lawyers,

economists etc.

ii. Semi – Skilled labour:- This type of labour depends on the nature

of the job. The labour must have acquired some skill either out of

constant practice or through some form of training. Unlike skilled

labour, no serious education and training is required for this kind

of labour. Example of workers in this category are clerical

workers, typists, hospital auxiliary staff mechanical attendants etc.

all these people may have a maximum of GCE or secondary level

of education.

iii. Unskilled labour:- Unskilled labour involves little or no

education. It requires the use of physical energy in production

workers like, cleaners, messengers, security man, and office

assistant’s fall under this category of labour.

Characteristics of Labour

1. Labour is mobile. A worker can decide to change job because of

location, marriage, childbirth etc.

2. Labour cannot be stored like capital

3. Unlike land labour is not fixed in nature. The quantity and quality 0f

labour can be increased through acquisition of skills and through

procreation.

4. Labour cannot be separated from the labour i.e a human being cannot

be separated from his labour ability.

5. Labour is not predictable.

6. Labour is perishable (through death).

7. Labour has feelings and its consent must be sought before it is used

for production.

8. A labour sells his labour and not himself

Division of Labour

Every sector of the economy manifesting, educational, banking etc. is

involved in division of labours. It means dividing or splitting the production

process into it components parts. Then, different workers are assigned to

perform these parts of production of the basis of their specialization. In the

banking sector for example some workers handle opening of accounts for

customers, some are at the counter paying, some are entertain complaints

from customers etc. without division of labour, the whole production process

will be very slow and cumbersome. Another example is in a bakery where

the production process iis divided into stages such as mixing of flour,

grinding of flour, moulding and cutting into sizes, loading into the oven,

removal from pan and selling of the bread.

The theory of Division of labour was enunciated by Adam smith in 1776 in

his book ‘The wealth of Nations’ he visited a place where ins were made and

found out that there are eighteen (18) processes involved in pin making. He

also found out that only one man was co – ordination all there processes.

Because of this vigorous process only 20 pins were being produced per day.

Adam smith concluded that if there eighteen processes were hard led by

different individuals, more pins will be produced. This idea was bought and

as a result, 48,000 pins were produced per day. This is how the application

of division of labour came into existence.

ADVANTAGES OF DIVISION OF LABOUR

1 It saves time: - Division of labour makes production process faster. Since

different stages are manned by different individual, the time and energy that

could have been dissipated in moving from one stage to another are saved.

2. Increase in the skill of workers: - The skill of workers increase as a result

of carrying out particular tasks often and often. Since practice makes perfect,

continuous handling of a production process increases the skill of workers.

3. Improvement in quality of goods produced: - Since the production

process is being handled by a skilled worker, the quality and standard of

gods. There will be less mistake and very wise utilization of resources.

4. Leads to specialization: Division of labour enables one to be a specialist

in the performance of a job because he/she sets better everytime that task is

handled.

5. Reduction in unit cost of product: - Division of labour increase

productivity thereby allowing total cost of the product to be spread over a

large output. Consequently, unit cost per output will be reduced. The effect

of this is increase in profit.

6. It creates employment opportunities: - Since each stage of the production

process is handling by a specialist the employment of specialist will

increase.

7. It makes the machine possible: - Division of labour bought the idea of

the use of machine for different stages of the production process.

NOTE: Read more on advantages of division of labour.

DISADVANTAGES OF DIVISION OF LABOUR

1. Monotonous of work : - Engaging in one type operation every time

makes the work monotonous uninteresting and dull.

2. Introduction of machines reduce employment : - machines are faster

and do more jobs than human beings perform majority of the job.

3. Immobility of labour : - A worker may find it difficult to change to

another type of work. He has been active and has stayed on a

particular jobs for a long times.

4. Interdependence among individual departments : - Absence of a

worker because of illness or death may disrupt the production process.

5. Lack of initiative : - Staying on a job for a long time will make the

worker streamlined to that particular job. He/she may end up knowing

little or nothing about other stages of the production process.

Having discussed labour, its merits and demerits, let us now go back

to other factors of production capital and Entrepreneur.

CAPITAL:

Capital, as a factor of production, could be defined as wealth reserved

for the production of further wealth it is a man –made factor of production. It

includes physical cash, machines, buildings, and other equipment and tools

used in production. Read or physical capital refers to capital in form of

physical goods like factors, commercial vehicles. Money capital on the other

hand means Naira and Kobo. It is capital in form of money and be used to

acquire physical or real capital. Like other factors of production, capital

plays a crucial role in the production of goods and services.

CHARACTERISTICS OF CAPITAL.

1. Capital is a man – made factor of production,

2. The reward of capital is interest.

3. Capital takes different forms like money, building, machinery etc.

4. It is subject to depreciation after long use.

5. Capital may be fixed in nature of machinery, building. It could also be

compact in nature e.g cash in hand.

IMPORTANCE OF CAPITAL

The importance of capital in the production process can not be over-

emphasized. Some of these importance are highlighted below.

1. Capital makes production possible : - Without capital, the production

of goods and services would have been a dream that may not come

true. Capital aids production and increase the output per worker.

2. It facilitates the production of quality products : - Fixed capital likes

machinery are used in producing quality products. A man –made

product will definitely not be of the same good quality as that

produces by machinery.

3. It Increases Efficiency : - The use of machinery enhances the

efficiency of the whole production process.

4. Capital determines the location of industry : - Capital like fuel and raw

material determine to a large extent whole an industry will be located.

Sometimes it determines the industry and the nature of goods to be

produced.

TYPES OF CAPITAL.

Capital can be divided into the following types:

1. Circulating capital or working capital: - There are the materials that

are processed into finished goods. Three change their form in the process of

production. e.g. raw material.

2. Fixed capital: - There are in form of assets that can last for a long time

they do not change form in the process of production e.g machinery,

building etc

3. Current capital: - These are the resources need for the day to day running

of the business. Like circulating capital, they also change from one form

to another. Another name for current capital is liquid capital. E.g cash

used to purchase raw materials, cash used in paying salaries etc.

4. Social Capital : - Also knowing as social amentias, they are provided by

the government to facilitate production process. Examples are roads,

electricity, carports. They make production and distribution of goods and

services easy.

ENTREPRENEUR

Entrepreneur is the factor of production that coordinates and

organized other factors of production I e land, capital and labour. The

entrepreneur administers the whole process of production. He is sometimes

referred tom as enterprise because he taken the risks by putting his capital

into the business. The aims of profit maximization and cost minimization are

achieved by the activities profit or loss.

ENTREPRENEUR AND LABOUR: -Why are they separated there has been

a controversial issue of why entrepreneur and labour are not referred as the

same since they are human factor of production. However, there are some

very vital roles performed by the entrepreneur which labour cannot perform.

These functions make the entrepreneur unique. They are

1. Decision making : - The decision of what to produce, quality to

produce, the quality to be supplied to the market, who to employ are

vested in the entrepreneur. Hence all decision that will lead to success

or future of the business is taken by the entrepreneur.

2. He provide the capital : - The entrepreneur provide the take off capital

for his business from this capital other factors, of production like

machinery, building, and labour are acquired, labour does not provide

capital.

3. He takes risk : - There is a lot of risk and uncertainty in business and

these are borne by the entrepreneur. Whether the business fails or

succeeds, it is the headache of the entrepreneur and he will bear the

effect of anything good or bad that happens to the business. Labour

cannot take these risks and can decide to care whenever there is

problem.

4. His co – ordinates other factors of production : - All other factors of

production are put into effective use by the entrepreneur. He measures

what level of input from there other factors of production that will be

optical for the production process.

5. Conduction of research : - The entrepreneur makes sure production

meets up with trends and developments in the society. This he does by

conduction researches into various areas where can be improvement

in the process and the quality of goods produced. He studies the

market to know what people need. He also trains his workers for

better productivity.

6. Other function: - The entrepreneur performs other numerous functions

to keep the business going. He determines the price to be placed on

goods and service, salaries to be paid to workers, payment of rents etc.

THE PRODUCTION POSSIBILITY CURVE (PPC)

Meaning: - Also know as Production Possibility Boundary, production

possibility curve refers to a curve or graph that shows all the possible

continuation of gods that can be produced in an economy with the available

resources. Since the resources used to produce are scare, we have to put

them into different uses instead of using them to produce more of a

commodity the production of other commodity has to be sacrificed for

example, the society must decide how much land shall into food production,

housing, building of schooling and reduce the number of factories that will

produce drugs, books or food items. If the society decides to use all

resources on food production that means there want is other resources for

drugs and books.

Assuming Nigeria as an economy has only food and cloth to produce.

How will Nigeria utilize the resources at her disposal to produce these two

products? If the society divides to produce more of food, that means less

cloth will be produced and vice versa. If the society devised however that

she want to produce only food that means no cloth will be produced at all,

these are the two extreme possibilities that we have. Let us now consider a

schedule and graph for further explanation on production possibility curve.

Possibilities Food /month kg Cloth/month kg

A 2500 0

B 2100 300

C 1900 400

D 1500 900

E 1000 1300

F - 2000

X (Non – feasible region)

Y

2500

A

2000 B

C

Food 1500 D

1000 Y E

500 F

0 500 1000 1500 2000

Cloth

From the above curve, points A to F indicate efficiency use of

resources. Point X indicate non- feasible region, i.e except some new

resources are discovered nothing can be achieved point Y (with in the curve)

indicates that resources were not efficiently utilized or there is

unemployment.

At the PPC slopes downward from left to right. This indicates the

concept of opportunity cost because to produce more of a particular product

certain amount of the other product has to be given up or sacrificed.

The economy may either be at full employment or underemployment.

There two conditions affect the position of the production possibility curve.

Full Employment of Resources

This is a situation where the society is making use of her scare

resources efficiently and is producing goods and services at full capacity. In

the graph above the points A to F indicates full employment of resources.

Unemployment of Resources

In this case, there are worker lands and factories it is not possible to

produce along the curve but inside the curve (point). The society is not

producing at full capacity because there is a waste of resources.

IMPORTANCE OF PRODUCTION POSSIBILITY CURVE

1. It explains the concept of scarcity of resources and choice.

2. It emphasizes the concept of opportunity cost.

3. It helps in solving the basic question of economic life such as what to

produce how to produce and for whom to produce.

4. It explains the fact that human wants are unlimited.