Unit-1 PRODUCTION

UNIT-1

PRODUCTION

ECONOMIC ACTIVITY

            An effort to do something is known as an activity. Why do so many people engage themselves in different activities? The answer is that they want to earn their livelihood and to satisfy their wants and needs.

Human activities are broadly classified into two categories;

            Economic activities: - Economic activities are those activities which relate to the production and exchange of economic goods or services for getting something in return. Eg:- Activities of traders, manufacturers, sellers, etc..

              Non- economic activities: - Non-economic activities are those activities which aim to the mental satisfaction rather than profit making. Eg:-A house wife is cooking for her family, social work without the intention of return, etc.

Meanwhile, cooking food in the hotel is an example of economic activity but cooking food for the family is a non-economic activity.

Types of Economic Activities

Economic activities are classified into the following categories;

            1. Business: - Business is an economic activity concerned with the production and distribution of goods and services with the object of making profit or acquiring wealth for satisfying material wants.

            2. Profession:-Profession is an economic activity wherein a person renders personal services of specialized nature by using his personal skills, for the purpose of earning something. Eg:- Services of Nurses, Teachers, Doctors, Lawyers, Accountants, etc..

            3. Employment: -Employment involves working for or under someone else,  known as the employer, in return for a salary or wage. The people rendering services (both mental and physical) are known as the employees.

Important Terms in Commerce

Goods:- All physical things or materials which are ready to use are known as goods, it can be seen and touched.  Eg:- books, pen, pencils, car, etc…

Services:- Services are physical or mental efforts for doing something. It cannot be seen and touched.  Eg:- Services of teachers, Doctors, Lawyers, Nurses, etc.

Needs:- The basic requirements of human being are known as human needs, these are limited in nature.

Eg:- food, clothes and shelter

Wants:- Human wants are those goods or services that require ever and above the basic needs, They are unlimited in nature.

Eg:- Car, Air conditioner, TV, Vehicles, etc

Economic goods:-These are goods which are produced and demanded by the consumers who are ready to pay a price for each. They are limited in supply.

Eg:- Books, pencils, clothes, TV, washing machine, etc

Free goods:-These are the gifts of nature; we don’t have to pay a price for those. They are unlimited in supply.

Eg:-Sunlight, Air, Water.

Barter system:- Barter system means the exchange of goods for some other goods. It is the mutual exchange of one’s goods to other’s goods without money as a medium of exchange. This system is replaced by the arrival of money.

Perishable goods (Non-durable goods):- The goods which are damaged in a very short period of time is called perishable goods. It cannot be used for more than one time.

Eg:- Meat, milk, fish, bread, vegetables, fruits, etc.

Durable goods:- The goods which are not damaged quickly and can be used for long time is called durable goods.

Eg:- Machinery, vehicles, TV, refrigerator, washing machine, etc.

Consumer goods:- The goods which are ready to be sold and consumed by the final consumers are called consumer goods. It directly satisfies the consumers.

Eg:- Tooth paste, coca cola, biscuits, T-shirt, etc.

Capital goods:- The goods which are used to produce other goods are called capital goods.

Eg:- Machinery, Tailoring machine, Crane, pick-up van, etc.

Raw material:- The materials which are used as input in the production of a finished goods are called raw materials. It is not useful to a consumer directly.

Eg:- Raw cotton, a piece of cloth, rubber, etc.

Demand:- Demand is a market force which indicates the total number of goods or services which are ready to be purchased by the buyers in a particular period of time.

Supply:- Supply is a market force which indicates the total number of goods or services which are ready to be produced by the producers in a particular period of time.

PRODUCTION

     Production is an economic activity by which the raw-materials are converted into finished goods to satisfy the requirements of the consumers. It is important to notice that a production process is said to be completed when the goods reach in the hands of the final consumers.

Eg:-Woods become furniture and Bricks, stone, cement, etc become buildings, bridges, etc. Production may be divided into three, Industry, Commerce and Direct services.

STAGES OF PRODUCTION (SECTORS OF PRODUCTION)

1. Primary production [Primary Sector]

2. Secondary production [Secondary Sector] 

3. Tertiary production [Tertiary Sector]

1. Primary stage

This is the first stage of production where It includes the extraction of basic raw materials from the nature and the reproduction of plants and animals. This stage is further sub-divided into two,

-Extractive industry

            -Genetic industry

Eg:- Mining, quarrying, fishing, farming, forestry, etc.

 2.  Secondary stage

            This is the second stage of production where the raw materials found in primary stages become semi-finished or finished products. Primary stage supplies the input for this stage. This stage includes the following two types of industries-

            -Manufacturing industry

            -Construction industry

Eg:- Textile industry, Building construction, Chemical industry, Road construction, etc.

3. Tertiary stage

This is the third stage of production where the finished goods are distributed to the consumers. This stage includes both commercial services and direct services.

    The commercial services include transportation, communication, warehousing, advertising, retailing, banking, insurance etc.

 The direct services refer to such services which are necessary even though they are not directly participating for production activities but they are necessary for a healthy work-force. For example, doctors, actors, civil servants, policemen, teachers, nurses, lawyers, etc.

CHAIN OF PRODUCTION (CHAIN OF DISTRIBUTION)

Chain of production is the way through which the raw materials are passed on and become finished goods and finally reaches in the hands of the consumers.

The Chain of production begins with the raw materials and ends with the consumers.

DIFFERENT FORMS OF CHAIN OF DISTRIBUTION OR CHAIN OF PRODUCTION.

1. Raw materials- Manufacturers-(Finished Goods)-Wholesalers- Retailers- Consumers.

2. Raw materials- Manufacturers-(Finished Goods) - Retailers- Consumers.

3. Raw materials- Manufacturers-(Finished Goods) - Consumers.

4. Raw materials- Manufacturers-(Finished Goods)-Wholesalers- Freight Forwarding agents- Retailers- Consumers.

INDUSTRY

An industry is a group of independent business producing similar articles. Individual unit of production is immaterial in the concept of industry.

TYPES OF INDUSTRY

1. Genetic industry

Genetic industry is related to the reproducing and multiplying of certain species of animals and plants. Eg:- Nurseries, Cattle breeding, Agriculture, Poultry farms, Fishing, etc

2. Extractive industry

The extractive industry is engaged to the extraction of raw materials from the soil, air, water or from the beneath the surface of the earth.

Eg:- Mining, Collection of minerals, quarrying, etc.

3. Construction industry

Construction industry is engaged in the creation of bridges, roads, buildings, etc for the development of the economy. Immovable things are produced under this industry.

Eg:- Construction of buildings, roads, dams, bridges, canals, airports, etc

4. Manufacturing industry

Manufacturing industry is engaged in the conversion of raw materials and semi-finished materials into finished products. Moveable things are produced under this industry.

Eg:- Cement industry, sugar industry, iron and steel industry, Cotton industry, etc.

Manufacturing industry can be classified into three:

            a. Analytical industry

            b. Synthetic industry

            c. Processing industry

a. Analytical industry

Here one raw material is analyzed and many products are received as finished goods.

      Eg:- Crude oil is the main raw material for making petrol, diesel, LPG, kerosene, etc

b. Synthetic industry

In synthetic industry, many raw materials are brought together in order to make a final product.

            Eg:-Vehicle manufacturing, Furniture manufacturing, etc

c. Processing industry

In this industry, a raw material passes through different various processes to become a final product.

Eg:-Cloth industry- Collection of raw cotton from the farmers-Makes threads- makes cloths-Tailors make clothes- reach to the consumers. Sugar industry, etc.

5. Service industry

These industries are engaged in the provision of essential services to the community. Service industry is classified in to two,

            a. Direct services:-These are services directly provided to the consumers without middlemen. There is direct contact between the render and the consumer.

            Eg:- Teachers, doctors, lawyers, nurses, accountants, etc

            b. Indirect services:-These services are also known as commercial services or aids to trade. These are provided to help the movement of finished products from the producer to the consumer.

Eg:- Finance, communication, transportation, advertising, insurance, warehousing, banking, etc.

FACTORS OF PRODUCTION

            Factors of production are important factors which speedup the production processes.

1.    Land

2.    Labour

3.    Capital

4.    Enterprise

1. Land

Land represents all the natural resources such as agricultural and building land, mines and quarries, rivers, oceans and atmosphere and everything where a business located.

The reward for land is called rent

2. Labour

Labour includes both physical and mental efforts, whether undertaken for payment or not or within the family or household.

The reward for labour is called wages or salaries

3. Capital

Capital represents not only wealth and finance but also physical assets such as machinery that can be used to produce goods and services.

The reward for capital is interest

4. Entrepreneur

Entrepreneur is a person or group who undertake the risk of running the business or production.

The reward for entrepreneur is profit or loss

DIVISION OF LABOUR AND SPECIALIZATION.

Division of labour is the process by which the complex works are divided into different categories and each category is assigned to expert personnel.

            Eg- In a business organization, there are so many departments such as finance, administration, labour, distribution, advertising, etc. Each department will be under the control of Head of the Department.

Specialization-means the process of ensuring maximum output by employing right employees in the right job, according to their skills and experiences.

Advantages of specialization.

1. Individual workers can concentrate on those jobs to which they are most suited.

2. Practice makes perfect. Once people have learned a job, their skills at it increase.

3. Division of labour normally allows a great saving on tools and equipment.

4. As the work is broken down into individual tasks, it is likely that new and more efficient techniques will be developed.

5. It makes possible to mechanize the production process.

6. It ensures the standardization of products.

Disadvantages of specialization

1. Interdependence: Each part of a factory or an industry depends on the performance of the other departments.

              For example if there is broke down in one section it can quickly spread to other sections, causing delays and sometimes unemployment.

2. There is a danger of boredom when a worker is performing a simple continuous routine, often hundreds times a day.

3. As machinery becomes more complex it replaces labour, causing unemployment.

4. The spread of division of labour normally leads to a decline in craftsmanship.

5. As machinery takes over, output is standardized and the choice of goods available to consumers is reduced.

6. Difficult to select skillful employees.

TYPES OF DIVISION OF LABOR

The principle of the division of labor is applied at all levels of economic activity

1. Specialization by industry

    An economy is made-up many industries, each of which tends to specialize on a particular product or process.  

  For example, in the UK there are industries which are specialized in the production of coal, oil, chemicals, clothing, pottery, and so on.

 2. Occupational division of labour.

            The division of labour according to the occupations or works is known as occupational division of labour.

            Eg:- Teachers, Fishermen, Carpenters, lawyers, Doctors, etc.

3. Geographical division of labour

            This is a type of division of labour according to the geographical location. Here the division is based on the production or manufacture of certain goods.

            Eg:- Arabian countries for Petroleum products, Maldives for fishing, Srilanka for tea leaves, China for electronic goods, etc

4. Complex division of labour.

            The process of dividing entire work of an organization into a number of specialized jobs is known as complex division of labour.

            Eg:- A business organization is classified into different departments like Finance, Administration, Marketing, Advertising, etc.

COMMERCE

Commerce includes all the economic activities connected with the distribution of goods and services with the object of earning profits. It includes Trade and Aids to trade. It is a part of production.

 Trade

 Trade is a branch of commerce, it means the buying and selling of goods for the object of earning profit. Trade is classified into two,

-Home trade (Wholesale trade and Retail trade)

-Foreign trade (Export trade, Import trade and Entrepot trade)

Aids to trade (Commercial services)

            Aids to trade are various activities which help the trade.  These are also known as commercial services. Both direct and indirect services are essential in the business aspects. This is also referred as indirect services.

            Eg: - Finance, communication, transportation, advertising, insurance, warehousing, Banking, etc.

TYPES OF TRADE.

1.Home trade or Domestic trade

The trade which is carried on within the boundaries of a particular country is called home trade, where the buyer and the seller belong the same country.

2.Foreign trade or International trade or Overseas trade

The trade between two countries is called foreign trade. The buyer in international trade called importer and the seller is called exporter and both belong different countries.

3.Entrepot Trade

Entrepot trade means importing of goods from one country and exporting the same goods to other foreign countries. Such countries act as collecting and distributing centres.

            Eg. Singapore, Hongkong, etc.

4.Wholesale trade

Wholesale trade consists of buying large quantities of goods directly from the manufactures for the purpose of selling to the retailers.

5.Retail trade.

Retail trade consists of buying goods from wholesalers in large quantities and selling them to consumers in units with the view to make a profit.