INTRODUCTION TO PRODUCTION AND COMMERCE

1. 0 Background and Introduction

In the olden days, people engaged in subsistence/survival production. This means
they were producing goods for themselves and their family that is to cover only their
needs and wants.
 Later they started interacting with one another because it was difficult for them to
meet their entire daily requirements (Needs and Wants).
 The system of Exchanging Goods for Goods called Trade by Barter then
came into existence.
 This is the Genesis of Exchange and perhaps the beginning of Commercial
activities the World other.
 Trading activities were however limited to Internal Trade only.

1.1 Needs and Wants

1.1.1 Needs
 The most common thing to the human beings is Needs.
 By needs we mean a state of felt deprivation( lack of something).
 The satisfaction of these needs is the drive force in life for many of us.
 There exists innumerable number of needs.
 There are those called “Basic Needs”, which include food, shelter and clothes.
 We also have services, which make our lives more comfortable and more
meaningful.
 Such services include those of doctors, teachers, lawyers, entertainers, etc.
 Luxury needs example entertainments etc
 People have gone through various stages to arrive at exchange for the
satisfaction of their needs.
1.1.2 Wants
 The function of human want is self-preservation or the attainment of higher
state of development.
 The first aim of human existence is to obtain a sufficiency of means of life
(Basic Needs).
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  These needs, which without them the life would be difficult to bear.
 The Needs and Wants continuously change and that people struggle to satisfy
them with those needs and wants.
 The satisfaction is possible through Goods and Services.
 Human needs and wants are gratified by the goods and services and these
are made available to people through exchange.
 Exchange is the Backbone of Commerce.

1.2 The Development of Commerce

 Commerce refers to all activities, which are involved in distribution and
exchange of Goods and Services.
 The Development of Commerce may be looked at through the following
stages:-
1.2.1 Production without Exchange
 A family or a person exploiting its natural surroundings and having no
intercourse with other groups would not be concerned with commerce.
 With the development of division of labour, it was realized that different
members of group had differing talents.
 With division of labour each person is assigned to join in which he could do it
best.
 The impact is that the total production of the whole group would be greater
than if they each tried to be self-supporting individuals.
1.2.2 Production with Exchange
 As the number of such group (Division of Labour) increased and that the
exchange of surplus production began to take place.
 The basic Patten of Commerce thus emerged.

1.3 Production
Production is a term applied to any activity aimed at bringing about a physical change in
a good so as to make it useful.

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Definition of Production
 A more comprehensive definition of Production involves the process by which
raw materials are transformed into a finished good suitable for use and delivered
to consumers.
Commerce is concerned with one section of this process.
i. It is a system by which raw materials are distributed to industry and the
finished products to consumers.
ii. A good would be required by a consumer only if it has an ability to satisfy
his need.
This ability of a good is called Utility.
 Production is thus a process aimed at creating utility in a good.

1.3.1 Methods/Types of Production

There are two major methods of production or satisfaction of wants can either be
accomplished Directly or Indirectly.
1.3.1.1 Direct Production
 Refers to producing goods and services for one’s own consumption.
 This is a form of production where an individual produces goods and/or
services for his/her own consumption.
 This occurs when someone attempts to satisfy his wants entirely by his own efforts.
 He may grow his own food, make his own clothing and build himself a place to
live. OR
 If a person fells a tree, cuts it into suitable pieces and joins the pieces to make a
table for his personal use, he would be said to be engaged in Direct Production.
Note: There are very few things that may be obtained by Direct Production and for a
great majority of our needs we have to depend on goods produced by other people.
 If we are to use goods and services produced by others, we will obviously have to
part with some of the goods produced by us, or render services to others.
This results in Exchange of Goods and Services.

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1.3.1.2 Indirect Production
 This is the production of goods and services by a person with the purpose of selling
to other people.
 This is production for the market.
 The person produces goods and services to satisfy the needs of others, e.g. a person
who rears goats for sale.
 This method of production encourages Specialisation and Division of Labour.
 This means Specialization in one particular occupation.
 This may involve producing goods for Export.

1.3.2 Branches of Production (Stages in Production)

 The process of Production has two distinctive stages:
i. First, the Goods must be made, that is brought into a form in which they can be
consumed, and the,
ii. Second, they must be brought within the reach of consumers.
 The first stage is called “Industry” and the second, “Commerce”.
 However, we may conveniently divide Production into three Branches or Stages,
Primary, Secondary and Tertiary in each of which the value of raw materials is
increased.
Simple branches or stages in Production are outlined below:-

 Production
 Industry (Extractive/Primary, Manufacturing, Constructive).
 Commerce
 Trade:-
 Home Trade (Retail and Wholesale)
 International Trade (Import and Export)
 Aids to Trade: - Banks, Insurance, Warehousing, Advertising, Transport,
Communication, Market Research, etc.
 Direct Services ( Doctors, Lawyers, Teachers, Entertainers, Watchman, Barbers,
etc)

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1.3.2.1 Industry
 Industry is that part of the process of Production that is concerned with bringing
goods into the form in which they can be consumed.
 Industry may be classified as follows:-
1.3.2.1.1 Primary Industries/Production/Extractive Industries
 Primary Industries are so called because they are the source of all raw materials
that will be used later for further processing.
 Is where raw materials are extracted from their Natural Deposit Or
 Is where goods are removed from where they are available to where they can be
used.
 At this stage of Production, the actual process is carried out by nature; the human
effort is restricted either to looking after the process or to removing goods from
where they are available.
 This includes Workers employed in Mining, Quarrying, Agriculture, Fishing,
Forestry, Oil drilling, and Farming (Extractive Industries).
1.3.2.1.2 Secondary Industry (Constructive or Manufacturing Industries)
 These Industries use the raw material made available by the Primary Industries
and transform them into a more useful form.
 For example, a textile mill takes cotton grown by cotton farmers (who are
engaged in Primary Industry) and transforms it into cloth that is a more useful
form.
 Secondary Industries again may be either “Manufacturing Industries” or
“Constructive Industries”.

1.3.2.1.2.1 Constructive Industries

 These assemble the already manufactured goods into finished goods e.g. Road-
making, Bridge-making, House Building-Builders use items such as cement,
timber, bricks, iron, glass etc.
1.3.2.1.2.2 Manufacturing Industries

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  These changes the form of raw materials into finished articles by using machines
or hands, cigarette making, pot making, cotton spinning are examples.
 In these industries the gift of nature produced by the extractive industries are
transformed into other forms which can be used either for further production or as
raw materials in the making of other goods.
 Therefore, secondary industry is concerned with the conversion of raw materials
into consumable goods. It changes the physical or chemical form of the raw
materials to make goods that satisfy consumers’ needs and wants.
1.3.2.1.2.3 Tertiary Production
 The process of Production may still be incomplete even when goods have passed
through the secondary stage for they will almost certainly be in the wrong place
for most consumers.
 The transfer of goods from factory to the consumer is where the activities of the
tertiary sector, the third stage of production are needed.
 The Tertiary Production has two broad groups; those offering Commercial
Services and those offering Direct Services.

1.3.2.2 Commerce and Division of Commerce

 Once goods have been manufactured, they must be brought within the access of a
consumer to be of any use to him.
 Commerce is principally concerned with the distribution and exchange of goods
and includes all those activities that in some way or another help the movement
of goods from the producer to the consumer.
 It is the function of Commerce to provide connecting link between the stages of
the process and to make the steps from stage to stage as easy as possible. Or
 Commerce links people who produce goods and services with those who want
to use them (consumers).
 On this ground Commerce can as well be defined as the study of how man
organizes the distribution and exchange of commodities so as to satisfy his
needs in the most efficient manner.

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  The many people, right from the humble retailer to the sophisticated financial
institutions who play some part or another in getting the goods within the access
of a consumer perform what we call “Commercial Activities”.
 These activities may be broadly classified into two groups, viz, those related to
the actual buying and selling of Goods and those that assist in the buying and
selling of Goods.
 The former type of activities is called “Trade” and the latter “Aids To Trade”.

1.3.2.2.1 Division of Commerce

 Commerce may be categorized into Trade and Aids to Trade OR
 Commercial activities may now be outlined in the form of a Chart as shown in
Fig. 1.

Figure 1: Divisions of Commerce

COMMERCE

TRADE AIDS TO TRADE

BANKS INSURANCE
HOME TRADE INTERNATIONAL TRADE

RETAIL WHOLESALE IMPORT EXPORT WAREHOUSING TRANSPORT ADVERTISING

 The “Trade” and “Aids to Trade” together constitute the “Subject-Matter of

Commerce”.
 So Commerce is a development of both Trading Activities and Ancillaries of
Trade.

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1.3.2.2.1.1 Trade
 This is a branch of Commerce involving the Buying and Selling of Goods or the
exchange of goods and services.
 A Trader is a person who buys goods with an intention of re-selling them at profit.
 Trade may be carried out between two traders of the same country or between two
traders from different countries.
 The former class of trade is called Home or Internal Trade and the latter is called
Foreign or International Trade.
 Home or Internal Trade may be carried out at two levels, wholesale and retail.
 Foreign or International Trade consists of Imports and Exports.
1.3.2.2.1.1.1 Home or Internal Trade
 This is a trade, which is carried out within the country boundaries.
 It consists of the Retail Trade and Wholesale Trade.
i. Retail Trade
 The buying of goods in large quantities mainly from a wholesaler and
reselling of them in small quantities to final consumer.
 Retailing therefore involves all activities concerned with the sale of
products to buyers who are the ultimate/end users of those products.
ii. Wholesale Trade
 A wholesale is an organization or individual that serves as an intermediary
between manufacturer and retailer and who facilitates transfer of product
and the title to them.
 A wholesaler may be defined as a trader who does not sell goods to the
consumer but either to another trader or a manufacturer.
 A wholesaler is a trader, that is, it is his business to buy and sell goods
without changing their form, with an intention of making profits.
 The major function of a wholesaler is to provide a link between the
producer and retailer.
 It is not unusual for a manufacturer to assume the wholesaling function
and sell his goods direct to the retailer.

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1.3.2.2.1.1.2 Foreign or International Trade
 This consists of all Trading Activities that involve Exchange across National
Boundaries.
 It includes Exporting and Importing.
i. Importing
 This is the purchasing of raw materials or products in other nations and
bringing them into one’s own country.
ii. Exporting
 This is the selling of domestically produced products in overseas markets.
1.3.2.2.1.1 Aids to Trade
 These are Auxiliary services to trade, which help the smooth running of trade.
 In brief, the activities or services that help/facilitate in the distribution of goods
are referred to as Aids to Trade.
 The services include Transport, Banking and Finance, Insurance, Warehouse,
Advertising, Sales Promotion, Communication, Market Research, etc.
 Without these services trade would be very difficult indeed.
1.3.2.2.1.1.1 Transportation
 This is a physical movement of products through a channel of distribution from
producer to consumer and among channel intermediaries.
 Goods move by land, water or air.

1.3.2.2.1.1.2 Warehousing
 Warehousing provide temporary storage facilities for raw materials and finished
goods. The stored goods are protected against damage caused by bad weather,
pests, theft, etc. Or
 These involve the commercial activity of holding and housing goods before
shipment to buyers or enter into other stages of production.
1.3.2.2.1.1.3 Advertising
 Advertising is the process of informing the public about the availability of goods
and services for sale, and persuading them to buy. Or

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  This consists of non-personal forms of communication conducted through paid
media under clear sponsorship.
 The aim is mainly to inform, persuade, increase market share and remind
potential consumers about products or services available to the sponsors/suppliers.
1.3.2.2.1.1.4 Communication
 Refers to the conveyance of information and ideas from one person to another.
 In other words, refers to the transmission of information from one person to
another, usually through a medium such as telephone, telegram, telex, letter,
email or face to face.
 Communication bridges the gap between producers, traders and consumers.
1.3.2.2.1.1.5 Insurance
 This is an aid to trade in which in return for the payment of premium an insurer
agrees to compensate the insured in the event of his suffering a specified loss.
1.3.2.2.1.1.6 Banking and Finance
 This service is provided by financial institutions. These institutions accepts
deposits, safeguard the money so received, make them available to its true owners
on demand, advances loans and provide other financial services. Apart from
keeping money they facilitate payments through cheques.
1.3.2.2.1.1.7 Market Research
 This is carried out to establish public opinion about a given product or service. It
enables the manufacturers to improve the quality of their products before putting
them on the market.
1.3.2.2.1.1.8 Sales Promotion
 These are activities undertaken by traders and producers to expand, and/or retain
the existing market for their products. Such activities include advertising,
branding, organizing trade fairs and exhibitions, and packaging.

1.3.3 Direct Services

 Direct services: refers to services which are provided to people directly.
 The user and provider must be present at the time when the services is being
provided or offered.

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  For example the patient and doctor have to be present when the service is being
provided.
In summary:
 These render services directly to the consumers.
 They involve the performance of some work only the results may be seen.
 A Doctor must examine his patients and prescribe medicine personally.
 They are far from the process of Production, however very important in
production e.g. health workforce improves the efficiency and saves time of more
directly productive workers although are not themselves engaged in the
production of materials commodities.
 Other examples include Estate agents, Travel agents, Teachers, Lawyers,
Barber, Tailors, Auditors and so on.

1.3.2.3 Importance of Commerce

The prime importance of Commerce as a branch of Production is creation of Utility. The
utility is the ability of a commodity to satisfy the human want or need.
 Through Commerce, goods and services are available to consumers in the right
place and at the right time.
The Importance of Commerce, therefore, includes the following:-
i. Bridge the gap between producers and consumers: Commerce enables
producers to inform customers about the goods and services for sale through
advertising or communication.
ii. Acquisition of capital: Through commerce, businessmen are able to acquire
capital in form of loans from banks.
iii. Compensation of losses: Commerce enables business people to get
compensation for losses caused by insured risks; hence their businesses
continue operating normally.
iv. Variety of goods is enjoyed: Through commerce, the public gets a variety of
goods and services from different producers. People are therefore given a
chance to excise their choice.

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 v. Creation of employment: Many people are employed in the commercial
sector as importers, exporters, transporters, advertising agents, insurance
brokers, wholesalers and retailers, hence improving their standard of living.
“By standard of living it means a level of comfort and wealth that a person
or a country has or aspires to have”.
vi. Making goods available: Goods and services are made available to
consumers through commerce.
vii. Encourages production: With commerce goods are taken to the final user,
which makes the production of goods more profitable. This encourages
producers to produce more.
viii. Preservation of goods: Commerce enables goods produced today to be
preserved for future use. This is done by ensuring a good warehousing
facility.
1.4 Classes of Goods
As explained earlier Production involves physical change in a Good, which aims at
increasing Utility.
 There exist at least two groups/classes of goods namely:-
A. Producers (Capital) Goods
 These are not desired for their own sake but only to assist the production of
consumer goods e.g. machinery, raw materials, factory buildings etc.
 They wear out and have to be replaced.
B. Consumer Goods
 These are the goods, which are desired for its own sake.
 They are in the form of which consumers wish to have them e.g. a shirt would be
used by a consumer directly.

1.5 Factors of Production

Factors of Production or Agents of Production may be defined as things necessary for
Production.
 Without them no Production would be possible.
These include Land, Labour, and Capital.

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  The three mentioned above factors are considered as the “Basic Factors of
Production”.
In addition we need the efforts of Managers and Organisers to coordinate or put
together the three “Basic Factors of Production” with a view to making the process
efficient. The Entrepreneurial Ability.
 That means, there must be someone who will undertake the entire project, arrange
and pay for all Factors of Production and prepared to stand the risks involved.
He is called an Entrepreneur.
Therefore we can classify the Factors of Production into Four:
I. Capital
 It may be mentioned here that the world “Capital” has almost as many meanings
as there are in fields of commercial activities.
 As Factors of Production, Capital includes such items as will assist in human
labour.
 It is also defined as “already produced goods used in production of other goods”
 It includes tools, machines, equipment and means of transport (vehicles) used by
people involved in production.
II. Labour
 Labour is human effort, but all human effort is not labour.
 For human effort to be called labour, the first condition is that it must be aimed at
“Production and paid for”.
 Thus, when a person plays table tennis for his personal pleasure, his efforts would
not be called labour, but when he works in a factory or otherwise contributes his
efforts, mental or physical, to any process of Production, his efforts would fall
within the meaning of labour.
 The activities of persons engaged in giving direct services (e.g. Teachers,
Lawyers, Doctors, etc.) are termed Labour.
 The second condition is that “all labour must be paid for”.
 Labour provide his/her effort to make sure that the right quantity of each factor of
production must go into the process at the right time, and in the manner, to
achieve maximum efficiency.

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(A) Division of Labour/Specialization
At present age, it is no longer necessary for a person to perform all the jobs, relating to
process of Production and hence the issue of Specialization.
 Modern Manufacturing methods have made Division of
Labour/Specialization a Must.
 By dividing the work over several workers, each worker is given only one
small task which, by repeated performance, will become easy for him and he
will not only obtain mastery over it but also become quick and more accurate
at it.
(B) Advantages (Pros) of Division of Labour/Specialization
i. Division of Labour, or Specialization, provides the following
Advantages/Pros:-
i. Degree of Choice
ii. Time and Energy Saving
iii. Developing Skills
iv. Tool and Machine Specialization
v. Benefit to the Community/Variety of Goods
vi. Minimization of Cost of Supervision
vii. Better Products are produced.
viii. Increases Production/Greater Output
ix. Creation of Employment
(C) Disadvantages (Cons) of Division of labour/Specialization
The following are some of them:-
(i) Over-Specialization.
(ii) Depersonalization.
(iii) Unemployment.
(iv) Monotony.
(v)Negative/Serious Repercussions to the Country economy.
(vi) Oversupply of a commodity.
(vii) Absence of one of the specialists in a particular time may affect the
whole process of production.

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(D) Land
 These includes all gifts of nature, things that are provided free by nature and
are free available on, above or under the surface of the earth.
 The source of any raw material is classified al land, be it agricultural produce,
fish, crude oil, forest wood , minerals and so on.
 It also includes air, sunshine, water, climatic conditions, etc., which play a
vital role in any production.
 Land is the most important Factor of Production.
(E) Entrepreneur
 He is a person or group of persons who undertakes the project.
 He supplies the necessary money to arrange and pay for the all four Factors of
Production namely; Land, Labour and Capital.
 He buys land (or pays rent for its use), he buys the necessary raw materials,
hires labourers, provides capital items (tools, machinery, etc.), employs
organizers.
 He retains whatever outcome of production and stands the risk of loss.
 He buys raw materials, human efforts and capital items must be brought
together and properly coordinated to make any production possible.
 .
 This is referred to as Organisation.
 All those people employed in any industry who do not take part in actual
processing of raw materials, are said to be engaged in organization e.g. Chief
Accountant, Managers.
Modern Technology
Technology is the application of knowledge to production.
 Modern technology improves the efficiency of labour.
 New machines and labour have helped cutting down time and expense
while increasing the overall output.

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 Why should you learn Commerce as a Subject?
 The study Commerce is useful for those who are engaged in commercial
occupations, whether it is in trade or in one of the service ancillary to trade.
Specifically the study of Commerce would therefore involve:
a) A study of trade, the principal activity in distribution of goods,
b) A study of ancillary services that make trade possible,
c) A study of how best the above two could be organized so as to satisfy the
needs of a consumer in the most efficient manner.
 Commerce as a subject of study therefore can fulfill a wider purpose; it can
provide a valuable introduction to a later study of economics in which students
are often handicapped by lack of knowledge of the facts of commerce.
Briefly Commerce should be studied because:-
1. Modern Commercial methods can be difficult to understand.
2. Enables you to acquire the knowledge necessary for running your business in the
future.
3. Everyone is involved in Commerce either buying or selling.
4. Everyone makes contract and Commercial knowledge may be important.
5. Consumer has to understand marketing techniques.
6. It is necessary to understand changes in the commercial world as they affect us.
7. Enables you to understand and experience the developments in the world of
business.
8. Enables you to learn the commercial language used in the day-to-day commercial
transactions.
9. It is a useful introduction for those who will specialize later on any of the
components of Commerce e.g. Insurance, Banking, Clearing and forwarding
agents, Hotels Management etc.
1.3.2.4 Commerce and Production
 Commerce follows Production.
 Goods may be distributed only after they have been manufactured
 However, some experts on Commerce hold that the Process of Production does
not become complete until the goods reach the Consumer.

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  In this broader meaning of Production, we include both the “Commercial
Activities” and “Direct Services”.
 The actual transformation of goods to a more useful form is the only a part of the
whole process and can be termed as “Industry”.
 In summary, Production may now be classified into Sections, Industry,
Commerce and Direct Services.
1.3.2.5 Classification of Occupations
 It was stated earlier that all of us who earn our own living are producers.
 It would therefore follow that whatever Occupation we have, as long as it is legal
and honest, it will fall within the “Premises of Production”.
 Therefore, Industry, Commerce and Direct Services are not only the main
branches of Production, but also the main divisions into which all human
occupations fall.
 A look around would easily convince you that all your friends, relatives or other
people that you know earn their livelihood from one of the branches of
Production.
1.3.2.6 Commerce and Economics
 Commerce is a branch of a much wider subject, Economics.
 Economics is concerned with the study of the allocation of scarce resources to
satisfy unlimited human needs and wants.
 Economics tells us that people have needs and some resources to satisfy their
needs are limited.
 The resources are never enough to satisfy all the needs and it therefore becomes
necessary to exercise choice.
 Economics therefore is concerned with the study of satisfaction of human needs
and wants at the level of individuals, nations or the world as a whole.
 In other language Economics deals with all activities involving Production,
Distribution, Exchange and Consumption.
 Commerce on the other is only a branch of Economics and is mainly concerned
with the processes of exchange and distribution of goods conducted by
businessmen who aim to make profit out of their activities. Or

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  Commerce is the study of how people organize the exchange and distribution of
goods and services to satisfy their needs and wants in the most efficient manner.
 It is therefore not surprising that Commerce is sometime referred to as “Business
Economics”.
1.3.2.7 Commerce and Business
 Business is a very wide term and applies to any activity carried out with an
intention of making a profit while standing a risk of loss. Or Business is any
legal activity carried out with the aim of making a profit.
 A person may be in business as a trader, a manufacturer, a farmer or a transporter.
 Commerce applies to activities related to trade and aids to trade only.
 All those engaged in Commerce are businessmen but not all those engage in
business are necessarily commercial people, e.g. a manufacture is a
businessman but is not engaged in commerce.
 A retailer is engaged both in Commerce and Business.

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