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

Production is the creation of goods and services, and their delivery to final consumers, for the satisfaction of human wants.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define production and utility;
2. distinguish consumer goods from capital goods, and durable goods from non-durable goods;
3. distinguish free goods from economic goods;
4. explain the difference between direct and indirect production;
5. describe primary, secondary and tertiary production and give examples of each.

What is production?

Production is the set of economic activities that create goods and services and make them available to final consumers.

• Purpose: to satisfy human wants.
• Who gets the output: people who are willing and able to pay for it.
• Utility view: production is also the creation of utility.
• Value judgement: economics does not ask whether a good is morally good or bad. It asks whether someone wants it and will pay for it.
• Completion: production is complete only when goods and services reach the final consumers.

What is utility?

Utility is the ability of a good or service to satisfy human wants.

• Every good or service produced must have utility.
• A product with no utility has no buyers, so it is not production in economics.

There are four common types of utility: form, place, time and possession.

• Form utility: created by changing the shape or nature of materials, as when cassava becomes garri.
• Place utility: created by moving goods to where buyers are, as when tomatoes move from Kano to Lagos.
• Time utility: created by storing goods until they are needed, as when grain is kept in a warehouse.
• Possession utility: created when ownership passes to the buyer through sale.

What are the types of goods?

There are two basic types of goods, consumer goods and capital goods, and goods can also be grouped as free goods or economic goods.

What are consumer goods?

Consumer goods are goods ready for use by the consumer without further production.

They are of two kinds: durable and non-durable goods.

• Durable goods: last usually more than one year and can be used again and again, for example radios, shoes, chairs and computers.
• Non-durable goods: perishable goods consumed almost at once because they spoil quickly, for example bread, yam, garri and apples.

What are capital goods?

Capital goods, also called producer goods, are goods used to produce other goods and services.

• Examples: sewing machines, vehicles, grinding machines and factory equipment.
• Buyers: mainly producers, not households.

What are free goods (non-economic goods)?

Free goods are useful goods that are not scarce, so they normally have no price.

• They come freely from nature.
• They are available in any quantity wanted.
• Examples: air, rain and sunshine.

What are economic goods?

Economic goods are useful goods that are scarce, so they command a price.

• People are ready to pay to own them.
• They can be priced according to value and volume.
• Examples: cars, books, cooking gas and clothes.

What are the types of production?

There are two types of production: direct production and indirect production.

• Direct production: making goods and services to meet the needs of the household, usually on a small scale, for example a family farming for its own food.
• Indirect production: production by specialisation for exchange, where the producer does not mainly aim to satisfy his own wants, for example a tailor who sews for sale.

What are the stages of production?

Production is classified into three stages: primary, secondary and tertiary production.

What is primary production?

Primary production is the first stage, the extraction of raw materials from land, air and sea.

• Farming: crops such as kola and cocoa, and animal husbandry.
• Extraction: mining, quarrying and oil drilling.
• Products: raw materials such as crude oil and kola.
• Fishing and forestry: also belong here.

What is secondary production?

Secondary production is the processing of raw materials from primary production into finished goods.

• Utility is added to the raw materials at this stage.
• Manufacturing: turning cocoa into chocolate, or crude oil into petrol.
• Construction: building houses, roads and bridges.
• Food processing: baking bread and making garri.

What is tertiary production?

Tertiary production is the last stage, made up of commerce and services that take goods to final consumers.

• Direct services: given straight to the consumer, for example teachers, barbers, hairdressers, musicians and soldiers.
• Indirect services: support trade and production, for example wholesalers, retailers, transporters, bankers and insurers.

Evaluation

1. Define production and utility.
2. Give two examples each of durable and non-durable consumer goods.
3. State the difference between free goods and economic goods.
4. What is the difference between direct and indirect production?
5. Name the three stages of production and state what each is concerned with.

Assignment

1. Explain why production is not complete until goods reach the final consumers, and give one example of each stage of production.