PRODUCTION AND THE FACTORS OF PRODUCTION:

Goods and Services are provided to consumers such that they can satisfy their wants and needs. We
must always remember that the basic and primary reason why producers get involved in the
production process is to make and maximize their profits.

But in order for this process to take place, firms must utilize resources as inputs, as in an example, in
order to make bread, KISS Baking company must locate and utilize the primary inputs or ingredients
such as flour, water and salt along with the necessary baking utensils and ovens in order for this
process to take place as well as the necessary human input labour to put these things into place.

We must also note that rivalry exists in our modern framework of the marketplace, many producers
make the same or similar product. This rivalry leads to what is known as competition amongst these
rival firms, this can be primarily achieved by employing strategies to make their products more
attractive to consumers, primarily on the aspects or basis of price. If firms can lower their costs of
production, then logically the unit costs of their products will fall as well. Firms can employ new
technologies so as to increase their productivity and efficiency in production.

THE PRODUCTION PROCESS:

This involves 3 main activities:

(1) Manufacturing of Goods: this can be carried out in factories or even at home for small- scale
producers like sole traders.
(2) Distributing of the goods produced: the finished goods will then be distributed via various
means to the targeted customers. There are many methods and ways by which this process
can be carried out.
(3) Providing Services: the producers can also provide services to meet the needs and wants of
consumers such as health, educational, transport, consulting and other privately provided
services.

Let us now examine a visual representation of the production process:

DIAGRAM 1: THE PRODUCTION PROCESS:

*** IT is always key to remember and understand the 3 Basic Economic Questions that every
economy and indeed the world faces and must answer they are again:
(a) What to Produce?
(b) How to Produce?
(c) Who Consumes?
In Economics resources are also referred to as the Factors Of Production (FOP’s) in the
diagram above some and not limited to only are identified in the box labelled as “inputs”
they all attempt to answer or justify the first economic question “How To Produce?” by
utilizing them in an efficient manner.

Let us now classify the wide assortment of those inputs or FOP’s into four groups or
categories.
They are:
(a) Land
(b) Labour
(c) Capital
(d) Enterprise.

Now it must be understood that in order to employ or use these FOP’s some form of
compensation, reward or payment must be paid to the owners of such resources.
** note that in Economics it is assumed that the owners of the FOP’s are the group
within the economy classified as the consumers or Households (HH) themselves.

LET US NOW CONSIDER THE ABOVE STATEMENT:

TABLE 1 THE FACTORS OF PRODUCTION AND THEIR ASSOCIATED REWARDS:

(a) LAND: this accounts for all natural resources on the planet that can be used in
the production process. It includes all agricultural land, forests, oceans, rivers,
and mineral deposits e.g. diamonds, gold, oil and natural gas. The payment for
the use of land of any kind identified above is called rent.
Most production processes in the Caribbean utilize land abundantly such as for
agriculture, mining as well as for extraction of Crude Oil.
Although land is limited in supply as are the resources found in it, it can be
increased physically by man- made efforts e.g. by reclaiming land from the sea.
Some parts of East P.O.S. are situated on reclaimed land
(b) LABOUR: this can be defined as the effort made by workers in the production
process and it can be categorized into 2 types:
(i) Physical labour: - this is the work done in a manual way or effort
e.g. construction workers
(ii) Intellectual labour: - this involves work done via intellectual
effort e.g. managers, teachers, economists, engineers.
Workers receive wages as payment for their effort in the
production process be it either physical or intellectual labour
being involved.

** note that the size of the labour force is also limited as there
are a finite number of workers who are of working age and are
willing to supply their labour services in the production process.

Mobility of labour:
This refers to the movement of labour there are 2 types of
mobility of labour:

(1) Occupational Mobility- this refers to the movements of

labour from one occupation to another e.g. a teacher may
decide to change jobs and become a lawyer. There are many
limitations of the occupational mobility of labour:
 The lack of necessary skills and qualifications- for
instance in order to become a lawyer, one must be
professionally trained as one.
 The age factor- older workers are generally less mobile
than younger ones.
 Sentimental reasons- having close ties with colleagues
and employers might be a factor causing one to stay on
at a job and not leave it

(2) Geographical Mobility of Labour:

This refers to the movements of labour from one place to
another, either locally or internationally some of the
obstacles to geographical mobility of labour are:
 Financial constraint- the cost of moving is a major factor
that restricts geographical movement.
 Political instability or even Wars, Crime- these can
discourage people from moving into the country
 National Pride- family and friends and also a sense of
belonging to one’s country or nationality can make
people think twice about moving to another.
 Language or Culture- differences in languages spoken
can be a major hindrance as well as vast cultural
differences within the foreign country or region.

THE DIVISION OF LABOUR:

 ** the concept and theory of the division of labour was
first postulated by the Scottish social philosopher Adam
Smith in his 1776 theoretical book “The Wealth of
Nations”
In the theory Smith postulated that one major JOB
could be split or divided into many repetitive tasks:

His theory describes the job of making regular safety

pins:
In it he assumed that if 1 person had to make the pin:
(1) first the person would have to cut the wire for the
pin by measuring the length needed for the pin.
(2) Secondly the person will have to sharpen the end of
the pin needed to be sharp.
(3) Third the person would have to attach the safety
bob at the end of the pin not desired to be sharp.
(4) Fourth the person will have to test the pin by
sticking it to a test cloth.
(5) Fifth the person will have to put the tested pin into
the box by which it would be transported in and
sold to the customer.
As we can clearly see this process can be seen as a
very long and tedious one if carried out by only 1
person making the pin.

Therefore, in his theory Adam SMITH theorized that

the one job be split into the many tasks as done
above and each single separate task be done and
handled by an entirely separate worker: hence the
name of the concept- the division of labour was
born it is also noted that this concept also gave rise
to the assembly line concept which became highly
successful in the 1920’s and 1930’s especially in the
car production process at that time, labour
productivity increased due to the implementation
of the above process.

ADVANTAGES AND DISADVANTAGES OF THE

DIVISION OF LABOUR:

ADVANTAGES OF THE DIVISION OF LABOUR:

 Increase in output- because of higher efficiency and

productivity, overall output increases.
 Use of machinery- the division of labour enabled the use
of more and higher adoption of mechanized processes.
  Increase in productivity- when workers perform
repetitive tasks they soon become experts at which task
they are assigned to.
 Greater Employment opportunities- by splitting of the
job into numerous singular tasks- more job
opportunities are created each requiring different skills.

DISADVANTAGES OF THE DIVISION OF LABOUR:

 Doing repetitive work can become boring and
monotonous- employees can lose moral and motivation
by doing the same thing day in and day out.
 Creativity can become stifled- there is little room for
creativity doing repetitive tasks and this can prevent or
stifle product progress or evolution
 Causes immobility of labour- when workers become
specialists or specialized at the task they are
accustomed to; they will have difficulty looking for other
jobs if they lose their current one.

LABOUR PRODUCTIVITY:

This can be defined as the output per worker per unit of

time or period e.g. the productivity of a wood worker
might be 10 wooden tables produced per day. It is
therefore the amount of output one worker can
produce in a given period of time.
the formula for calculating labour productivity is as
such:

labour productivity= Total OUTPUT/ number of workers

(c) CAPITAL- capital can be defined as all the goods used to produce other goods
and services, capital is usually man made assets e.g. machines, computers,
factories, cars etc.
***** note that the return to capital is known as interest, any increases to
capital are called investments.

** Capital Formation- this refers to an increase in the amount of capital

available for production, in order to have capital formation there must have
been initial savings and investment being done.
Individuals and producers must save in order to be able to pay for new capital
investment. Any capital formation will thus add to the productive capacity or
add to the ability of the economy to produce more goods and services in the
future.
(d) ENTERPRISE: this F.O.P is responsible for organizing the other 3 F.O. P’s listed
above. Enterprise is the role of the entrepreneur, they are therefore the
decision makers by accepting all of the risks of producing the goods and services
that they produce which may or may not be sold. The reward of undertaking or
accepting such risks is known as profits.

FUNCTIONS OF AN ENTREPRENEUR:
 Accepting and taking all risks in the decision to produce,
and distribute goods and services.
These risks include:
(i) Insurable risks such as fire and theft, these risks
can be covered by an insurance company.
(ii) Non-insurable risks- these are called
uncertainties. NO insurance company will cover
such risks e.g. losses incurred for products
unsold or events due to the volatility of
economic conditions such as change in
consumer tastes or fashions, these losses can
mean the entrepreneur might have a problem
sustaining his business.
 The entrepreneur co-ordinates the other F.O. P’s by
sourcing them first, combining them at the optimum
way in order to lower costs and maximize profits.
 Hiring and firing workers, depending upon market
conditions
 Undertake Research and Development(R&D) in order to
stay ahead of competitors follow and lead the market as
well as to lower production costs and hence maximize
profits, the main aim of the entrepreneur.