CHAPTER FIVE
PRODUCTION THEORY
Production is any activity aimed at bringing about a physical change in a good to make it satisfy human wants. It is
the process of transforming inputs or raw materials into more useful final products to satisfy human wants. It is the
creating of utility in goods to satisfy human wants.
The production process is not complete until the commodity has reached the final consumer.
Stages/levels/categories of production
There are three stages of production namely:
1. Primary production
2. Secondary production
3. Tertiary production
Primary production
This is a stage where raw materials are extracted from their natural state e.g. farming, fishing, mining,
lumbering, bee-keeping, oil drilling, etc. The products at this stage are called primary products e.g. agricultural
products, fish, timber, etc.
Secondary production
This is a stage where raw materials extracted at the primary stage, are processed and turned into finished goods
for example turning cotton into clothes, timber into furniture.
Secondary production involves manufacturing which involves turning raw materials into finished goods and
construction like bridges, road making, house building etc.
Tertiary production
Tertiary production is the provision of services or intangible commodities.
The output of the primary and secondary stages have to be transported, stored, advertised, and insured. Such services
form the bridging stage.
There are two main types of services provided,
(a) Personal/Direct services:
These are services provided in person. The service provider and the service consumer must be in direct contactor
communication for effective delivery e.g. hair dressing services, Medical care services, teaching services etc.
(b) Commercial services:
These are services provided indirectly in large amounts to improve business operation or production. Such services
include transport services, banking services, insurance services etc.
Types of production
There are two types of production namely;
1. Direct production
2. Indirect production
Direct /subsistence production
It refers to the production of goods and services for one’s own/self use or consumption. For example a carpenter
making
his own chair, a Tailor making his own shirt or a farmer growing food crops for his own consumption etc.
Characteristics of subsistence production
Producers mainly use poor/backward/primitive technology
There is limited specialisation and trade
Mainly produce poor quality output
Mainly use unskilled labour
Mainly barter system of exchange is used.
Mainly family labour is used
Mainly produce low output
There are limited innovations and inventions due to lack of competition.
Advantages of subsistence production
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 1
,o There is limited wastage of resources since whatever is produced is consumed by the producer.
o It is cheap because it uses cheap and abundant (unskilled) family labour.
o It uses simple tools that are easy to get by the low income groups e.g. hand hoes, knives etc
o It is easy to manage because it is organised on small scale and thus it require limited managerial and supervision
skills.
o It is the main source of food.
o There are no transport costs involved since the producer is the consumer.
o It is highly flexible. Subsistence productions easily change from one activity to another.
Disadvantages/ demerits/ shortcomings of subsistence production
It leads to low tax revenue because people in this sector do not pay taxes.
Leads to limited innovations and inventions in the sector due to lack of competition. This discourages
technological development in an economy.
It leads to slow economic growth rate due to low quantity of output produced
It leads to production of poor quality output due to use of poor technology and lack of competition.
It leads to high levels of under- employment and seasonal unemployment because producers rely on family
labour.
It leads to under utilisation/under exploitation of natural resources because production is on a very small scale.
It leads to limited specialisation and trade which hinders commercialisation of an economy since the goods
produced are not for exchange.
Reasons why subsistence production/ sector is dominant in developing countries:
o Many people are poor and therefore lack capital to carry out commercialized production.
o There is existence of low levels of education and thus producers are not able to carry out commercialized
production but rather concentrate on subsistence production.
o Use of poor technology. This makes it hard to produce high quality products in case the producer has to sell.
o Conservatism by the people and therefore resist change from subsistence production to commercial
o production.
o Poor infrastructure. This makes it very difficult to take the products to markets especially agricultural products.
o Existence of a small market which cannot sustain commercialised production.
Indirect/commercial/market production:
Indirect production is the production of goods and services for sale or for the market in order to make profits. E.g. a
carpenter making chairs for sale, a farmer growing crops for sale, tailor making clothes for sale etc.
Features/ characteristics of market production
a. Producers are mainly profit oriented/motivated
b. There is specialisation because the producers sell their output in order to get what they do not produce.
c. They mainly produce high quality products due to competition that exists in the market.
d. They mainly employ skilled labour.
e. They mainly use improved techniques of production.
f. Production is mainly on large scale
g. The exchange of output is basically done using money
h. Production mainly involves research into better means of production and adding value.
Merits of commercial production
It contributes to government revenue because commercial production activities are taxed by government.
It leads to improvement in quality of goods due to competition and use of skilled labour and modern
technology.
It facilitates economic growth because of increased output due to production on large scale.
It encourages technological development because producers carry out innovation and invention into better
technique of production
Economies of scale are enjoyed in the fields of transport, marketing, technical development and management
which reduces the cost of production.
Specialisation in production is possible because of large size of the production plants and hence the advantages
of specialization such as improved quality and increased output.
Commercial production facilitates the development of infrastructure since there is constant need for transporting
final output to the market or need for producers to transport inputs to the production unit.
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 2
, It generates more employment opportunities due to large scale production that involves many activities like
actual production, processing, transporting, warehousing, marketing etc.
Leads to increased export earnings because some output from commercial production is exported to other
countries. This eventually leads to improvement in the country’s balance of payment position.
It leads to increased utilisation of a country’s resources due to large scale production which necessitates the
utilisation of the would be idle resources such as land.
Demerits of commercial production
It is expensive because it involves high costs of production like high cost of hiring skilled labour, buying
modern machinery, paying high indirect taxes etc. This reduces the profit margin of the producers.
It leads to resource wastage resulting from over production where producers remain with unsold output.
In case of change in demand or change in tastes of consumers against a product, the producers suffer great
losses leading to wastage of resources.
There is danger of technological unemployment as a result of mechanisation in production where human beings
are replaced by machines at work.
It leads to rise in the cost of inputs such as raw materials and other intermediate products due to the increased
competition for such inputs by many commercial producers.
It leads to quick depletion of resources due to their over exploitation as a result of large scale production.
It leads to diseconomies of scale in the long run. This is because large scale production results into management
problems, transport problems supervision problems etc. All these result into increased cost of production.
Limitations of market/commercial production
o Small market
o Limited capital
o Poor infrastructure
o Conservatism
o Limited Labour skills
o Limited entrepreneurial skills
o Political instability
o Poor technology
o Poor land tenure system
FACTORS OF PRODUCTION/AGENTS OF PRODUCTION
Factors of production also known as agents of production refer to resources used in the production process to
produce goods and services in order to satisfy human wants.
Production cannot take place if one of the factors of production is missing. This implies that the factors of
production are interdependent. Some of the factors of production are financial (financial resources) such as capital,
some are natural (natural resources) such as Land and others are human such as labour and entrepreneurship.
There are four factors of production namely;
a. Land
b. Labour
c. Capital
d. Entrepreneurship.
Each of them is rewarded for its contribution in the process of production and such a reward is called a factor Price.
A factor price refers to a monetary reward/ payment given to a factor of production for its contribution in the
process of production.
The factor prices are;
i. Wages and salaries for labour
ii. Interest for capital
iii. Profit for entrepreneurship
iv. Rent for land
LAND
This refers to all natural resources i.e. free gifts of nature that are used in the process of production.
It includes all kinds of natural resources such as agricultural land, minerals, plants, water bodies etc.
Characteristics of land
It is a free gift of nature
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 3
PRODUCTION THEORY
Production is any activity aimed at bringing about a physical change in a good to make it satisfy human wants. It is
the process of transforming inputs or raw materials into more useful final products to satisfy human wants. It is the
creating of utility in goods to satisfy human wants.
The production process is not complete until the commodity has reached the final consumer.
Stages/levels/categories of production
There are three stages of production namely:
1. Primary production
2. Secondary production
3. Tertiary production
Primary production
This is a stage where raw materials are extracted from their natural state e.g. farming, fishing, mining,
lumbering, bee-keeping, oil drilling, etc. The products at this stage are called primary products e.g. agricultural
products, fish, timber, etc.
Secondary production
This is a stage where raw materials extracted at the primary stage, are processed and turned into finished goods
for example turning cotton into clothes, timber into furniture.
Secondary production involves manufacturing which involves turning raw materials into finished goods and
construction like bridges, road making, house building etc.
Tertiary production
Tertiary production is the provision of services or intangible commodities.
The output of the primary and secondary stages have to be transported, stored, advertised, and insured. Such services
form the bridging stage.
There are two main types of services provided,
(a) Personal/Direct services:
These are services provided in person. The service provider and the service consumer must be in direct contactor
communication for effective delivery e.g. hair dressing services, Medical care services, teaching services etc.
(b) Commercial services:
These are services provided indirectly in large amounts to improve business operation or production. Such services
include transport services, banking services, insurance services etc.
Types of production
There are two types of production namely;
1. Direct production
2. Indirect production
Direct /subsistence production
It refers to the production of goods and services for one’s own/self use or consumption. For example a carpenter
making
his own chair, a Tailor making his own shirt or a farmer growing food crops for his own consumption etc.
Characteristics of subsistence production
Producers mainly use poor/backward/primitive technology
There is limited specialisation and trade
Mainly produce poor quality output
Mainly use unskilled labour
Mainly barter system of exchange is used.
Mainly family labour is used
Mainly produce low output
There are limited innovations and inventions due to lack of competition.
Advantages of subsistence production
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 1
,o There is limited wastage of resources since whatever is produced is consumed by the producer.
o It is cheap because it uses cheap and abundant (unskilled) family labour.
o It uses simple tools that are easy to get by the low income groups e.g. hand hoes, knives etc
o It is easy to manage because it is organised on small scale and thus it require limited managerial and supervision
skills.
o It is the main source of food.
o There are no transport costs involved since the producer is the consumer.
o It is highly flexible. Subsistence productions easily change from one activity to another.
Disadvantages/ demerits/ shortcomings of subsistence production
It leads to low tax revenue because people in this sector do not pay taxes.
Leads to limited innovations and inventions in the sector due to lack of competition. This discourages
technological development in an economy.
It leads to slow economic growth rate due to low quantity of output produced
It leads to production of poor quality output due to use of poor technology and lack of competition.
It leads to high levels of under- employment and seasonal unemployment because producers rely on family
labour.
It leads to under utilisation/under exploitation of natural resources because production is on a very small scale.
It leads to limited specialisation and trade which hinders commercialisation of an economy since the goods
produced are not for exchange.
Reasons why subsistence production/ sector is dominant in developing countries:
o Many people are poor and therefore lack capital to carry out commercialized production.
o There is existence of low levels of education and thus producers are not able to carry out commercialized
production but rather concentrate on subsistence production.
o Use of poor technology. This makes it hard to produce high quality products in case the producer has to sell.
o Conservatism by the people and therefore resist change from subsistence production to commercial
o production.
o Poor infrastructure. This makes it very difficult to take the products to markets especially agricultural products.
o Existence of a small market which cannot sustain commercialised production.
Indirect/commercial/market production:
Indirect production is the production of goods and services for sale or for the market in order to make profits. E.g. a
carpenter making chairs for sale, a farmer growing crops for sale, tailor making clothes for sale etc.
Features/ characteristics of market production
a. Producers are mainly profit oriented/motivated
b. There is specialisation because the producers sell their output in order to get what they do not produce.
c. They mainly produce high quality products due to competition that exists in the market.
d. They mainly employ skilled labour.
e. They mainly use improved techniques of production.
f. Production is mainly on large scale
g. The exchange of output is basically done using money
h. Production mainly involves research into better means of production and adding value.
Merits of commercial production
It contributes to government revenue because commercial production activities are taxed by government.
It leads to improvement in quality of goods due to competition and use of skilled labour and modern
technology.
It facilitates economic growth because of increased output due to production on large scale.
It encourages technological development because producers carry out innovation and invention into better
technique of production
Economies of scale are enjoyed in the fields of transport, marketing, technical development and management
which reduces the cost of production.
Specialisation in production is possible because of large size of the production plants and hence the advantages
of specialization such as improved quality and increased output.
Commercial production facilitates the development of infrastructure since there is constant need for transporting
final output to the market or need for producers to transport inputs to the production unit.
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 2
, It generates more employment opportunities due to large scale production that involves many activities like
actual production, processing, transporting, warehousing, marketing etc.
Leads to increased export earnings because some output from commercial production is exported to other
countries. This eventually leads to improvement in the country’s balance of payment position.
It leads to increased utilisation of a country’s resources due to large scale production which necessitates the
utilisation of the would be idle resources such as land.
Demerits of commercial production
It is expensive because it involves high costs of production like high cost of hiring skilled labour, buying
modern machinery, paying high indirect taxes etc. This reduces the profit margin of the producers.
It leads to resource wastage resulting from over production where producers remain with unsold output.
In case of change in demand or change in tastes of consumers against a product, the producers suffer great
losses leading to wastage of resources.
There is danger of technological unemployment as a result of mechanisation in production where human beings
are replaced by machines at work.
It leads to rise in the cost of inputs such as raw materials and other intermediate products due to the increased
competition for such inputs by many commercial producers.
It leads to quick depletion of resources due to their over exploitation as a result of large scale production.
It leads to diseconomies of scale in the long run. This is because large scale production results into management
problems, transport problems supervision problems etc. All these result into increased cost of production.
Limitations of market/commercial production
o Small market
o Limited capital
o Poor infrastructure
o Conservatism
o Limited Labour skills
o Limited entrepreneurial skills
o Political instability
o Poor technology
o Poor land tenure system
FACTORS OF PRODUCTION/AGENTS OF PRODUCTION
Factors of production also known as agents of production refer to resources used in the production process to
produce goods and services in order to satisfy human wants.
Production cannot take place if one of the factors of production is missing. This implies that the factors of
production are interdependent. Some of the factors of production are financial (financial resources) such as capital,
some are natural (natural resources) such as Land and others are human such as labour and entrepreneurship.
There are four factors of production namely;
a. Land
b. Labour
c. Capital
d. Entrepreneurship.
Each of them is rewarded for its contribution in the process of production and such a reward is called a factor Price.
A factor price refers to a monetary reward/ payment given to a factor of production for its contribution in the
process of production.
The factor prices are;
i. Wages and salaries for labour
ii. Interest for capital
iii. Profit for entrepreneurship
iv. Rent for land
LAND
This refers to all natural resources i.e. free gifts of nature that are used in the process of production.
It includes all kinds of natural resources such as agricultural land, minerals, plants, water bodies etc.
Characteristics of land
It is a free gift of nature
ECONOMICS CHAPTER 5 THEORY OF PRODUCTION NOTES PREPARED BY MR. ANTONY AMBIA Page 3
