Theory of Production II – SS1 Economics Lesson Note (First Term)

Production is the combining of agents of production in different proportions to create goods and services that satisfy human wants. The four factors of production are land, labour, capital and entrepreneurship, and each earns a reward: rent, wages or salaries, interest and profit.

Behavioural objectives

1. Define production and factors of production.
2. Name the four factors of production and describe each one.
3. State the reward for each factor of production.
4. List and explain the factors that determine the volume of production.
5. State the importance of production to individuals and to the country.

What is production?

Production is the creation of goods and services that satisfy human wants, by combining the agents of production.

• Goods: physical items that can be touched, such as rice, shoes and cars.
• Services: work done for others that cannot be touched, such as teaching, nursing and banking.
• Utility: the satisfaction a person gets from using a good or service. Production creates or adds utility.
• When production is complete: production ends when the goods or services reach the final consumer.

What is the difference between goods and services?

Goods are physical items that can be touched, while services are acts done for others that cannot be touched.

What are the types of production?

There are three types of production: primary, secondary and tertiary.

• Primary production: getting raw materials from nature, as in farming, fishing, mining and logging.
• Secondary production: changing raw materials into finished goods, as in manufacturing, building and food processing.
• Tertiary production: providing services that help other producers and consumers, as in banking, transport, teaching and trading.

What are the factors of production?

Factors of production are the agents or resources combined in different proportions to produce goods and services.

What is land?

Land is all natural resources that are a gift of nature, with no human effort used to create them.

• Examples: soil, forests, rivers, minerals, crude oil, rainfall and sunshine.
• Reward: rent, paid to the owner of the land.

What is labour?

Labour is all physical and mental effort that people put into production for a reward.

• Examples: a farmer, a teacher, a tailor, a bricklayer and a doctor.
• Reward: wages for manual workers, and salaries for office and professional workers.

What is capital?

Capital is man-made goods used to produce other goods and services.

• Examples: machines, tools, factory buildings, trucks and money used to run a business.
• Reward: interest, paid to the owner of the capital.

What is entrepreneurship?

Entrepreneurship is the skill of organising the other three factors and taking the risk of production.

• Entrepreneur: the person who starts the business, makes the main decisions and bears the risk of loss.
• Reward: profit, which is what remains after all costs are paid.

What factors determine the volume of production?

The volume of production is the quantity of goods and services a producer makes, and seven main factors decide it.

1. Availability of capital: a producer with enough money can buy materials and machines and pay workers.
2. Availability of raw materials: a steady supply keeps the factory running, for example cocoa for a chocolate maker.
3. Efficiency in management: good planning, organising and control reduce waste and raise output.
4. Size of market: a large demand encourages producers to make more goods.
5. Efficiency of other factors of production: skilled workers and fertile land give higher output.
6. High level of technology: modern machines produce more goods in less time.
7. Nature of the product: some goods, such as fresh fish and tomatoes, spoil quickly, so output must match what can be sold in time.

Why is production important?

Production is important because it supplies the goods and services that people and the nation need.

1. Availability of goods and services: it supplies the things people need and want.
2. Better standard of living: more goods and services improve the comfort of people.
3. Employment: factories, farms and offices give jobs to people.
4. Increase in wealth: producing more raises the wealth of individuals and the nation.
5. Export potential: surplus goods can be sold abroad to earn foreign exchange.
6. Acquisition of skills: workers learn new skills on the job.
7. Income for government: government collects taxes from producers and workers.

Practice questions

1. The reward for entrepreneurship is: a) Rent b) Wages c) Interest d) Profit
2. Which of the following is a reward for a factor of production? a) Interest b) Donation c) Gift d) Subsidy
3. Land is a factor of production because it: a) is a gift of nature b) contains valuable minerals and resources c) assists in the creation of utility d) is owned by individuals and governments
4. Which factor of production consists of man-made goods? a) Land b) Labour c) Capital d) Entrepreneur
5. In economics, production is completed when: a) goods are manufactured in the factories b) commodities are sold to the final consumer c) goods and services get to the retailer d) producers fix the price of goods produced

Evaluation

1. State four factors that determine the volume of production.
2. State four reasons why production is important.
3. What is the reward for land? What is the reward for labour?
4. Which factor of production earns interest?
5. Name the three types of production and give one example of each.

Assignment

1. Define production. Then list the four factors of production and give the reward for each.