PRODUCTION

Production is the creation of goods and services which satisfy human wants and needs for which they
are prepared to pay a price.
OR
Production is the act of creating or manufacturing something. The product usually have an exchange
value.
Factors of production
Production takes place when the resources/factors of production are combined.
There are FOUR main factors of production
Land or natural resources
Labour or human resources
Capital or manmade resources
Enterprise or entrepreneur

Land

Land consist of all the natural resources on the earth, including those of the sea. It comprises the
geographical surface of the earth, rivers, lakes, seas, minerals and chemicals. It includes mineral
deposits such as bauxite, oil, iron ore, gold and diamonds. It embraces sunshine and rain fall, rivers,
ponds and lakes, the sea oceans, airspaces, desert and the forest. It is a free gift of nature and is
considered the most important factor of production.

Natural Resources and Main Industries of selected Caribbean countries

Country Natural resources Main Industries

The Bahamas Beaches, barrier reefs Tourism/hospitality, financial
services

Antigua and Beaches, sunshine Tourism, education tourism,

Barbuda Throughout Caribbean investment banking, financial
services

Barbados Coral reefs, beaches, caves, coastal Tourism/hospitality, financial

landforms services, information services

Belize Wildlife, flora and limestone, barrier Tourism/hospitality

reefs

Dominica Mountains, rainforest, rivers, hot Agriculture, ecotourism

springs, whale watching
 Guyana Fertile soil, fish, shrimp, bauxite, gold, Sugar production, fishing, and fish
timber, diamonds, manganese processing, rice, gold mining, metal
and glass production

Jamaica Bauxite, gypsum, limestone, beaches, Tourism/hospitality, agriculture,

Clay water, rich soil bauxite, gypsum industry, cement

Trinidad and Tobago Asphalt, crude oil, natural gas, fertile Oil production, liquefied natural
soil gas production, agriculture, asphalt
production

Bricks, earthen tourism/ware pots

(clay pots)

Jewellery, industrial diamonds

Labour

Labour includes any human effort - mental or physical – that contributes to production for which
payment must be made. All productive activities require some form of labour. Labour is often divided
into skilled, semi-skilled and unskilled labour.

Classification of labour by skill

Labour skill level Explanation Examples

Unskilled Jobs that involve very little or no Watchman, vendor, labourer
formal training
Semi-skilled Jobs that require some formal Driver, domestic servant,
training and possibly a work-based data entry operator,
qualification plumber, machinist
Skilled Jobs that require a high level of Engineer, computer
training. Often combine with operator, doctor, architect,
considerable experience. teacher, nurse etc

In determining the size of a labour force the following should be considered.

1. The size and volume of the operation.

2. The amount of capital invested.
3. The level of skill and training available
4. the level of wage rate existing in the industry or country.

Labour intensive firms use more people and less machinery, whereas capital intensive firms use more
machinery and technology and fewer people.
Factors influencing/affecting the labour supply

1. The total size and age structure of the population.

An aging or very young population would mean a smaller labour supply. If the policy of
the country is to retire its citizens at an earlier age then this would restrict the labour
supply. If the population is vey young, then the majority of the citizens are still in school
and not a part of the labour force.

2. Cultural patterns and religious reasons

If women are not allowed to work the availability of labour will be adversely affected.

3. Government policy on school leaving age and the retirement age.

Changes in these will have a significant impact on the total number of people available for
work.

4. Mobility of labour

The willingness of people to move to another place to work will affect the labour supply.
Usually, people move easily to areas with equal or greater amenities such as good schools,
recreational and shopping facilities.

5. Skill levels

If the population has the appropriate skills and is healthy this would be reflected in the
labour supply.

6. Education policy and the health of the nation

 Government and business finance training programmes for workers which can help to reduce the
shortage of skilled workers.

 If the training period of individuals is long then a smaller population would be available to form
the labour force. If the government decided to extend tertiary education to more persons, then
fewer would be available for work.

 With better health facilities, individuals would spend fewer days from their jobs because of
illness.

7. Migration pattern

 The ease with which individuals can leave a country affects the labour force.
 Internal migration is the movement of people within a country e.g. rural to urban and vice versa.
  External migration - people are attracted to developed countries to experience a perceived better
lifestyle and, therefore, more Caribbean people move to the United Kingdom, U.S.

Capital

Capital refers to the money and all other assets that are employed in the process of production. Capital
can be divided into fixed and working capital.

Fixed capital – items that remain in business for a long time and used to produce further wealth e.g.
Plant/Building and Machinery, office Equipment and Vehicles.

Working capital – items that are used up in the day-to-day operation of the business eg stocks of raw
materials, cash, and bank balances.

Enterprise or Entrepreneur

For a business to be successful it requires persons at the top who make the major decisions and
coordinate the factors of production. These activities are usually done by the owners and entrepreneurs
take risks, raise finance, employ, coordinate and reward factors of production and ensure the factors of
production are efficiently used.

Production and Productivity

Production is the act of creating or manufacturing something. This product usually has an exchange
value.
Productivity is a useful measure of efficiency, that is how many units were produced from a given
quantity of raw materials by machinery or people in a given period of time.
Productivity is important for several reasons
1. the more productive the resources of the business, i.e. machinery and labour force, the more profits it
will earn.

2. By measuring productivity the business can measure its own progress, i.e. whether it has been improving.

3. measuring productivity allows the business owner to identify any weaknesses or gaps that may need to be
improved on or fixed.

4. Comparing productivity with other similar businesses tells the firm how competitive it is – the efficiency of
the business

Production can be expressed as a value ($) or as the total number of units produced.
Productivity is measured by using a ratio of output to input

Productivity = output (goods or services produced)

Input (workers, money, machines, raw materials)

Factors influencing productivity

Since productivity is affected by every area of production there are many factors that can influence it:

 Layout of the factory or work area: the layout should be logical and simplified to maximise efficient
movement from workstation to another.
 Quality of raw materials/inputs: Good quality raw materials improves productivity and reduces
wastage.
 Job fit and training: Good job fit (having the right person doing the right job) between the worker and
the job ensures that the job will be done well. Workers must be provided with the necessary skills and
training.
 Worker motivation: Motivated workers are keen to achieve business goals, especially if they understand
that they will be rewarded for doing so. Rewards can be financial and non-financial and incentives
should be provided for workers.
 Management skills: Management must be well organised to ensure that all the necessary resources to
complete the production task are in place. Management must also encourage good relationships
between employees and trade unions, provide a safe and comfortable working environment, and
encourage workers to increase their output levels and to give suggestions.
 Equipment and use of technology: Well-maintained machines that are regularly serviced and used
properly by workers improve production levels. New technology introduced into the production process
can also increase productivity levels.
 Health of worker: a healthy workforce will be more efficient and have fewer sick days.

Types of Production
There are four types of production. They are linked to three different sectors within the economy. Types
of production refer to the different forms of productive or economic activities associated with producing
goods and services.
 Primary sector
 Secondary sector
 Tertiary sector
Primary Sector (extractive)
Primary production is an activity that involves extracting from our natural resources. It is the first stage
of production. These natural resources are raw materials which will be used later to produce finished
goods. Examples include fishing, mining quarrying, farming (agriculture) etc.
Secondary Sector (manufacturing and construction)
Secondary production is the second stage of the production. The activity involves converting raw
materials into finished goods (adding value).
This involves manufacturing - examples include the canning of fish etc, juices, baking, refining of oil,
making jewellery etc. Construction - raw materials supplied by other industries, such as clay and
concrete blocks, cement, sand gravel and steel are combined to construct buildings, roads, bridges etc.
Tertiary Sector (Services)
This final stage of production. The tertiary sector comprises the service industries. Services are
divided into:
Direct services which are personalised services – hairdressing, babysitting, plumbing, healthcare,
education etc.
Indirect services (commercial Services) involving trade and the other activities related to trade –
banking, insurance, advertising, transportation, communication etc. (They support the production and
distribution process).

Production levels
The level of production (volume of output) of a business is largely dependent on the following factors
1. The availability of resources, including e availability of land, machinery and buildings.
2. The level of technology, that is manual labour, mechanisation, automation or computerisation.
3. The cultural patterns of the country, e.g. whether women are allowed to work or not.
4. The political and economic policies of the country, that is whether the country has a stable
political climate and progressive economic policies relating to trade, taxation and monetary
policy
There are four levels of production, subsistence, domestic and surplus levels of production
Subsistence
A subsistence level of production is geared towards satisfying basic need. The country is barely able to
produce enough to meet the needs of its citizens (person produce just enough to for themselves and their
families. At this level most persons are engaged in agricultural activities. Production ss not very
efficient. Citizens experience low standard of living and the country does not have any extra goods to
be traded with other countries.
Domestic
At this level, the country produces enough goods and services to meet the needs of its citizens using
local resources such as land and labour. The production levels are enough to meet the needs of all the
citizens, but it is unable to produce extra which can be exported.
Surplus Production
At the surplus level, the country produces more than enough goods and services to meet its domestic
needs and the extra/surplus is exported to other countries. Surplus production is found mostly in
countries that have large supplies of raw materials and advanced (modern) technology to export the
surplus, when sold, earns the country valuable foreign exchange which can be used to purchase imports
such as medicines, equipment and technology.

Export Production
Some countries produce goods solely for the export market. These goods are not sold locally or may
have minimum levels of demand locally. The export level should be the aim of all producers or
manufacturers because at this level foreign earnings will be obtained.

Cottage Industries
Cottage industries are small businesses that are usually carried on in the home (or from local community
centres, church halls etc).
Characteristics/features
1. They use the labour of family members or community members.
2. The products are usually simple to produce.
3. They generally use manual labour and any machines used are simple or inexpensive, hence,
the scale of production is small.
4. Most of items are made from local raw materials.
5. Small capital is needed.
6. Profits made are usually ploughed back into the business.

The Caribbean economies have many thriving cottage industries these include:

 Handicraft items for example, pottery, leatherwork, woodwork, knitting items, floral
arrangements, making of dolls, knitting and embroidery works and basketry items etc.

 Food items, for example, condiments, pastries, jams and jellies.

 Personalised services, for example, tailing, hairdressing, barbering and sewing.

Benefits

1. They provide employment (people find work without leaving their home).
2. Work can be combined with household activities, gardening or childcare.
3. Provide an opportunity to use one’s skills.
4. Cottage industries provide a market for local agricultural or other products.
5. Only a small amount of capital is required.
6. If the products are exported, the country earns foreign exchange.
7. Use of local raw materials and sometimes recycled materials which help to reduce the
waste problem.
8. Help to promote the country since most of these items may be purchased as souvenirs by foreigners.
9. Can earn foreign exchange for the country.

Functions of Small firms

Small firms, which are firms with less than 25 employees play a very important role in our economies.
They are very important to Caribbean economies as our market size does not support very large-scale
production or very large businesses.

Characteristics /features of small firms/business

1. Small capital -usually less than $250, 000

2. Small sales turnover
3. Less than 25 employees
4. Simple technology – usually manual labour
5. Occupying small land space

Benefits of small firms to our economies

1. They produce goods and services to customers and offer wider choices – they often provide goods and
services that larger firms cannot supply e.g. a bicycle shop manufacturer will want to sell you a new
bike if yours need repair – but a small local bicycle shop would be happy to repair it for you.

Large firms also tend to be very specialised in their offering of products which target the mass appeal
of consumers. Small firms offer products and services that might not be widely available.

2. Small business help to reduce unemployment by recruiting workers. Many small businesses are set
up in villages and rural areas, therefore, reducing the unemployment level there (they hirer workers
from the community).

3. Small businesses increase competition for large businesses and encourage them to become more
efficient - a large furniture store might charge for delivery of furniture – but a local shop might be
prepared to delivery at no charge. This forces the larger retailer to offer free delivery too. Small
businesses offer an alternative to the large businesses for the customer. This makes prices
more competitive, thereby benefiting the customer.

4. A small business provides income for the owners of the business and for the workers/employees
especially if the workers also have seasonal jobs that do not pay regular wages.

5. Responsive to changes in the marketplace – because of their size, small firms can respond much
faster to changes in the demand for a good or service than a larger business would be able to.

6. Small firms are often innovative, introducing and developing new ideas for goods and services eg
event planning.
7. Provide longer hours of service to the public - family owned small businesses tend to be open for
longer hours than larger businesses and are able to offer more personalised services to their
customers.

Growth of the business

If a small firm is successful, then the owners may want to expand the firm.

Reasons for wanting growth

1. Make high profits by selling more.

2. Employ other members of family or community.
3. Take over a competitor and reduce competition.
4. Increase sales and make the business more secure, e.g. opening a new shop or factory.
5. Benefit from economies of scale which can reduce the cost of producing each unit

Methods of expansion (How firms grow)

A business can grow in size through:

1. Internal growth

This occurs when a business uses its own resources to increase its scale of production. This can be
done by hiring more staff, purchasing or hiring of additional machinery and equipment to increase
output (by developing new products), increasing the size of business premises; or increasing the
number of premises it operates or increasing efficiency) and opening other outlets.

2. External growth

This type of growth is more common than internal growth. It occurs when one or more businesses
combine to form a larger one, (also known as integration). This can be done through:

1. Joint ventures – a contractual agreement between two or more organisations to share their
expertise, investment, management, cost, profits and risks of running a new business project.
When the JV has completed and reached its objectives, it is usually dissolved.

2. Mergers – these occurs when the owners of one or more business organisations agree to combine
their capital and operations to form a new larger enterprise.

3. Take overs or acquisitions – one company buys enough shares in the ownership of another so that
it can take overall control. It can happen with or without the agreement or the owners of the
other company.
Linkage Industries/Spin off industries
A linkage industry is a firm that is connected to another industry. The output (finished product) of one
firm is the input (raw material) in the making of product(s) in another firm. Its where the product from a
firm in the primary sector is use as input (raw material) for another firm in the secondary sector which is
then use in the tertiary sector. For example, the tourism industry depends on the agricultural sector and
the cottage industry for products such as fruits, vegetables, and craft items.

There are two types of linkages

1. Forward linkage
2. Backward linkage

Forward linkage is when the products (output) of an industry are used by businesses further along in
the chain of production (the output of one industry is the input for the other industry) e.g. a sugar factory
has a forward linkage with a business which uses sugar to make drinks or chocolate.

Backward linkage is when the products of an industry are used by businesses further back in the chain
of production e.g. when sugar producing firm/factory (secondary production) must purchase the sugar
can from the sugar estate (primary production) to service the factory.

Benefits

1. Employment is created, this creates income for those previously unemployed, who then create
employment for others through the purchase of goods and services.

2. Industries learn from each other, spreading best practice techniques, encouraging innovation and
Making more comprehensive use of natural resources.

3. Contracts that are entered into with the linkage firm ensure more secure markets for the firm.

4. Backward linkage provides a stimulus to other local industries such as agriculture, mining or first
Stage manufacturing (primary industries).

5. Forward linkage provide materials which can be used to develop industries for secondary
Manufacturing e.g. sugar cane growers provides raw materials for a sugar factory (it could not
operate without it).

6. Where there is good backward linkage there is no need to import raw materials. This saves valuable
foreign exchange.

Effects of growth on a business

Small businesses that are successful will grow. This growth has a significant effect on:

1. Organisational structure

As the business grows the number of customers increases, the sales revenue increases and the volume of
work increase substantially for existing workers. This results in a need for clearly defined duties and
responsibilities as well as more workers. Therefore, departments will have to be set up along the main
functional areas – marketing, production, finance and human resources. It reduces the overlaps in duties
found in the small business and allows workers to become specialised in their particular areas.

2. Capital

Expanding the business will need mor capital for the purchase of equipment and machinery and raw
materials to produce larger quantities of finished products, to pay the salaries of workers and to facilitate
the purchase or rental of larger facilities and to meet day-to-day expenses.

3. Labour

As new departments are added there will be he need for more specialised staff and manages to supervise
these departments.

4. Use of technology

As firms grow there is more finance available to invest in technology in various areas of the business eg
in the office desktop computers, in production department, inventory software ot keep track of inventory
and sales, or scanners for retail outlets etc.

5. Potential for export

As the firm grows it may be able to produce a surplus (more than is required for the domestic
market) which can be sold on the export market.

6. Scale of production (economies of scale)

When an organisation produces in greater quantities, it leads to a fall in the unit cost of production. This
reduction in cost is called economies of scale. It adds to the overall efficiency of the business and its
level of productivity.

Economies of scale can be classified into two categories

1. Internal economies of scale

2. External economies of scale

Internal economies of scale

Internal economies are benefits that accrue/occur at the level of the individual plant/firm, or as a result
of how the firm is organised (they occur within the organisation).

Internal economies

1. Technical savings

This type of cost reduction takes place in businesses which are highly capital intensive. The
introduction of more efficient machinery increases production and reduces the unit cost of production.

2. Managerial economies

In small businesses the owner is usually the general manager who makes most decisions (marketing,
production, financial etc). Larger firms can afford to employ qualified specialist to manage the work in
the various functional areas. Their level of training and experience ensures that the firm runs more
efficiently. They will make better decisions with fewer mistakes. This will lead to lower cost of
producing each item.

3. Marketing economies

If the firm produces more/expands production, the sale staff who are now fully specialise in this area can
increases the volume of sales without the need to increase the numbers of sales staff. Distribution and
advertising cost may be lower for each unit produced e.g., placing an advertisement in a newspaper
involves a fixed cost – if a larger business sells more units than a small firm therefore the advertising
cost per unit of goods sold will be less.

4. Purchasing economies of scale

As the business grows, it will purchase its own supplies in larger quantities, and by purchasing in bulk it
will receive discounts from suppliers.

5. Transport

The business may have depended on its suppliers to deliver raw materials to it, but now it can invest in
its own vehicles to make deliveries to its customers and collect raw materials from its suppliers.

6. Financial economies

As a larger business, qualifying for loans at more favourable rates of interest become easier as it can
demonstrate/show to the lending agency.

1. its success in its field through higher sales revenue

2. The reduction in risk and its improved ability to repay loans

They are often more stable and safer investment, more assets and collateral
7. Risk-bearing economies
As the business grows it can invest in other areas which means it can diversify. This spreads the risk of
loss over different areas of business. Once successful higher levels of revenues are earned. If one area
makes a loss it is unlikely that all the others will also experience losses e.g. Coreas Inc.

External Economies of Scale

External economies of scale are cost reductions that the firm experiences as a result of growth and
expansion of the entire industry, or growth withing a geographical area or the growth of an entire
economy. They are beyond the control of the individual business for e.g.

1. Where there are many businesses concentrated in a particular area, specialist firm may be
established to satisfy different needs, e.g. a recruitment agency which supplies specialist workers
suitable to the industry.

2. The government may have embarked on projects to increase the width of roads in a business area
to accommodate large delivery trucks as well as to improve the supply of electricity and water
used in the business.

Large-scale and small-scale production

Advantages of small-scale production

1. Providing personalised services e.g. hairdressing, tailoring, manicuring etc.

2. Flexible opening and closing hours
3. self-employment, which offers personal satisfaction. Employees also feel a sense of belonging and
acceptance.
4. More personal contact with customers e.g. the owner of a small shop deals directly with customers
and therefore, would be best able to respond to customers’ needs quickly.
5. Located in small villages and communities that are not serviced by big business.

Disadvantages

1. Owners and managers may not have all the skills necessary to run a business e.g. the owners may be
good a selling the product but do not efficiently carry out the accounting function.
2. There is limited leisure time for the owners because of the long working hours.
3. Limited fund hinders growth.

Disadvantages of large-scale production

1. Lack of proper supervision because of its complexity and bureaucratic structure.
2. Poor communication between management and staff, leading to conflict.
3. Workers association formed so workers can contribute to decision – making e.g. trade unions.
4. As the business expands, cost of production would increase more than output and gradually the firm
would begin to experience diminishing returns.

Labour-intensive Industries

Labour intensive production occurs where more humans/labour are employed than machines. These are
industries in which human and animal labour play the major role in production.

Labour-intensive production means that employment is generated and tis results in high labour cost,
high production is found mainly in developing countries.

Capital-intensive industries

Capital intensive industries employs more machines that humans in the production process and this
involves a high level of mechanisation and computerisation.

Mechanisation and Automation

Larger businesses are able to invest in machines and equipment to replace humans. This allows for
mechanisation and automation. Mechanisation refers to introduction or use of machines in the
production process. Automation on the other hand, takes the process one step further in that certain
processes work on their own, that is, without direct human involvement. The human support needed is
usually technical when stoppage occur, for quality inspections or during the down time period for
servicing and repair.

Mechanisation or Automation which is the change from labour-intensive to capital-intensive may have
social and economic implications, such as the encouragement of mass production, and therefore
reduction in the unit cost of production.

Automation is the use of programmed machines with little human support needed. Machines are
programmed to produced goods seamlessly from start to finish. This increases production significantly.

Machines can also endure extreme temperatures, considerable height and depths and are therefore
capable of performing complex and near impossible task that man cannot perform for example packing
of contents in cartons requires repetitive, boring actions that can easily be done by machines. In the
Caribbean automation can be found in garment manufacturing, drinks production etc.

With mechanisation, the quality of goods produced is easily maintained through standardisation.

Linkage Industries/Spin off industries

A linkage industry is a firm that is connected to another industry. The output (finished product) of one
firm is the input (raw material) in the making of product(s) in another firm. Its where the product from a
firm in the primary sector is use as input (raw material) for another firm in the secondary sector which is
then use in the tertiary sector. For example, the tourism industry depends on the agricultural sector and
the cottage industry for products such as fruits, vegetables, and craft items.

There are two types of linkages

1. Forward linkage
2. Backward linkage

Forward linkage is when the products (output) of an industry are used by businesses further along in
the chain of production (the output of one industry is the input for the other industry) e.g. a sugar factory
has a forward linkage with a business which uses sugar to make drinks or chocolate.

Backward linkage is when the products of an industry are used by businesses further back in the chain
of production e.g. when sugar producing firm/factory (secondary production) must purchase the sugar
can from the sugar estate (primary production) to service the factory.

Benefits

1. Employment is created, this creates income for those previously unemployed, who then create
employment for others through the purchase of goods and services.

2. Industries learn from each other, spreading best practice techniques, encouraging innovation and
Making more comprehensive use of natural resources.

3. Contracts that are entered into with the linkage firm ensure more secure markets for the firm.

4. Backward linkage provides a stimulus to other local industries such as agriculture, mining or first
Stage manufacturing (primary industries).

5. Forward linkage provide materials which can be used to develop industries for secondary
Manufacturing e.g. sugar cane growers provides raw materials for a sugar factory (it could not
operate without it).

6. Where there is good backward linkage there is no need to import raw materials. This saves valuable
foreign exchange.