PRINCIPLES OF BUSINESS

SECTION 5- PRODUCTION

NAME__________________________________________________________

GRADE_________________________________________________________

OBJECTIVES

(i) identify factors in the production of goods and services;

(ii) identify industries developed from the natural resources of Caribbean territories;

(iii)differentiate between production and productivity

(iv)explain the importance of productivity;

(v) explain the role of capital in production;

(vi)differentiate amongst types of capital;

(vii) classify the different types and levels of production;

(viii)describe the characteristics of cottage industries;

(ix)outline the functions of small businesses;

(x)discuss the advantages and disadvantages of small business

(xi)explain how a business grows internally and externally;

(xii)outline the opportunities for and benefits of developing linkage industries; and,

(xiii)explain the effects of growth on a business.

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 PRODUCTION

PRODUCTION
 Production can be defined as the making of goods or services that can be used or sold to
satisfy the needs and wants of people.

5.1 FACTORS OF PRODUCTION

 Factors of production are the resources needed by businesses to produce goods and services.
 The four factors of production are land, labour, capital and enterprise.
 Land - includes not only land but also natural resources found on and under the earth,
seas and air. E.g. water, gold, copper, diamond
 Labour - includes any human effort mental or physical that contributes to production for
which payment is made. E.g. repairing a road [physical effort], preparing accounts
[mental effort]
 Capital- resources that enables production of goods and services to take place. E.g.
machines, equipment.
 Enterprise- is shown by people when they combine other factors of production to form a
business. They aim to produce goods and services and sell them to make a profit.

5.2 NATURAL RESOURCES OF THE CARIBBEAN AND THEIR INDUSTRIES

Country Natural Resources Industry Product

Jamaica and Bauxite Bauxite Aluminium used in

Guyana pots and pans

Plaster used in foot

Gypsum Gypsum creams, black board,
fertilizers

Trinidad and Pitch Asphalt Road construction

Tobago and shingles
Energy and fuel
Natural gas Petroleum

Petrol and by
Oil and natural gas Petroleum products such as
plastic and paint

Guyana and Belize Forestry Construction Wood used in

furniture and
construction of
houses

Guyana Gold and diamond Gold and diamond Jewellery

Manganese Metal Metal and glass

products

Barbados, Jamaica, Limestone Construction Cement products

Trinidad and
Tobago

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5.2 DIFFERENCE BETWEEN PRODUCTION AND PRODUCTIVITY

Production
 Production is the process of combining inputs (raw material) with human resources to
create goods and services to satisfy human wants and needs

Productivity
 Productivity measures efficiency, it is the amount produced per worker, this means that
the resources are being used in an effective and efficient manner.

 Sometimes an employer gives an increase in wages or a bonus to the employee to

encourage productivity. However, the employer has to ensure that an increase in
productivity does not result in reduced quality.

Productivity Format:
 Productivity = Output [Goods and services produced]
Input [Workers, money, machinery, raw material]

 Example: if a business produced 100 chairs in a week and there were 10 employees.
Calculate the labour productivity

Labour productivity = Output 100 chairs = 10 chairs per employee

No. of employee 10 employees

5.4 IMPORTANCE OF PRODUCTIVITY

 Productivity is important because:

 More products can be produced- resulting in an increase in sales and profits for the
business which could lead to further expansion
 It lowers the cost of production - making it cheaper to produce goods and be able to
purchase raw materials from the supplier in greater quantities
 It leads to an increase in sales and profits - thus leading to an expansion of the business
 It allows a business’s product to compete more effectively in the foreign market -
which will increase the country’s export

 An increase in productivity can be achieved via:

 encouraging human resource development - as better trained workers tend to

work faster and more efficiently
 providing good working conditions - which will motivate the workers to be
more productive
 encourage positive work ethics - such as encouraging workers to come to work
on time, and avoid absenteeism.

5.5 ROLE OF CAPITAL IN PRODUCTION

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  Capital as a factor of production refers to the machinery/tools that enables
production to take place, capital is therefore important, as it allows more goods to
be manufactured that could not be produced by labour alone.
 Example - capital (the equipment) is needed in deep sea drilling, using human effort
(labour) only could not achieve this.
 NB: Capital intensive production uses more equipment and less people resulting in an
increase in productivity while labour intensive production uses more labour and less
machinery.

5.6 TYPES OF CAPITAL

 Fixed capital- assets such as buildings, machinery which will be kept for a long time and
used many times in the production process.

 Working capital - includes stocks of goods and cash needed for day to day running of
the business.

 Venture Capital - is finance provided to new or small business with the potential for
growth by wealthy investors.

5.7 TYPES AND LEVELS OF PRODUCTION

 TYPES OF PRODUCTION
a) Primary Production [Extractive Industries]
 Primary production is the first stage of production, it involves extracting raw material
from above or below the earth’s surface. E.g. oil drilling, natural gas, fishing, agriculture

b)Secondary Production

 Secondary production involves converting raw material from the extractive industries
into the desired product e.g. extracting wood to make a chair, crude oil is used to generate
electricity, and bauxite ore is converted into aluminium.
 Secondary production consists of two types: Construction (e.g. bridges, roads, building)
and Manufacturing (e.g. furniture, cars, food products)

c). Tertiary Production [Service Industries]

 Tertiary Production are industries that provide a service and not a physical product.
 Tertiary production can be divided into direct services and commercial services
 Examples of direct services (personal services) dentist, teachers, doctors
 Examples of commercial services: advertising, banking, transport, insurance

 LEVELS OF PRODUCTION

a) Subsistence Level
 Goods are produced to meet the basic needs of the group/family, there is little or no
surplus products to be sold to pay for other products.

b) Domestic Level
 All products are produced for local /domestic market, mainly from local resources
 It does not involve any level of import from countries or exports to other countries

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 c) Export Level
 This is a situation in which a country produces goods to be sold outside of the country
 It creates jobs and the income from export is used to import other goods and services

d) Surplus Level
 This is where a country produces goods to satisfy the local market as well as surplus
goods that can be exported to other countries.

5.8 CHARACTERISTICS OF COTTAGE INDUSTRIES

 An industry where the creation of products and services is home- based or

community based rather than factory based where the business is usually small.
 They rely on manual labour rather than expensive machinery
 They offer employment to family members
 They use local material like wood, clay, recycle materials to reduce waste E.g. products
made include: leather-craft, embroidery work, floral arrangements, basketry, making
dolls, making pastries, tailoring, hairdressings, barbering, making jams and jellies.

5.9 SMALL FIRMS

 A small business is owned by private individuals and has a relatively low number of
employees and sales.

Functions of Small Firms

 It creates employment and thus income for individuals who will be able to improve their
standard of living.
 It provides services that large firms are not willing to provide example a bicycle repair
shop.
 It provides a Niche market that does not interest a large firm for example an event
planning service (e.g. wedding and parties) and beauty services (e.g. hair - dressing).
 It creates profit which is the main reason that an entrepreneur takes the risk in creating
and operating a business.

5.10 ADVANTAGES AND DISADVANTAGES OF A SMALL FIRM

Advantages
 It provides goods/service that a large firm may not provide e.g. repairing a bicycle
 It increases competition for larger firms and encourage them to become more efficient,
example a large firm may be forced to offer free delivery services if a small firm was
doing it first
 It provides employment especially in rural areas by recruiting workers as many large
firms operate in towns or cities
 Small firms sometimes introduce and develop new ideas for goods and services (for
example, event planning).

Disadvantages

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  Small firms may lack expertise in certain areas so they have to pay for outside
expertise because they cannot afford to employ a specialist. E.g. an IT specialist
 The owners may find it difficult getting a loan from financial institutions compared to
larger firms
 Although they provide personal services, they cannot always provide sufficient after
sales services.

5.11 GROWTH OF A BUSINESS

 Many large firms that exist today started as a small business and have grown. There
are various ways a business can grow mainly - internally or externally.

Internal growth
 Internal growth occurs when a business expands through using its profits to invest
resulting in further expansion. Examples of internal growth are discussed below:

 Opening other outlets - for example if a retailer has been successful in operating
a bakery, he could open another branch at a different location.

 Employing more workers - a large firm can employ specialist staff that would
further contribute to greater profitability.

 Increase in capital - that could be used to invest in buying equipment that can
produce more products efficiently.

External Growth
 External growth occurs when one firm takes over or merges with another. Examples
of external growth are discussed below.

 Joint ventures -this is where two or more businesses pool their resources to
achieve a particular goal. E.g. a small business that has created a unique product
may enter into a joint agreement with a large firm to sell its product through the
larger company’s distributor.

 Mergers (amalgamation) – is where two or more companies merge into a single

business so as to expand their operations in order to diversify and make more
profits.

 Takeover/acquisition- is where the control of one business is taken over by

another business by purchasing 51% of its shares.

5.12 LINKAGE INDUSTRIES

 Linkage industry is one that is linked with another, that is, one industry produces
something that another needs. It is sometimes called a ‘screw driver’ industry or ‘spin
off’ industry.

Forward linkage
 When one industry provides raw material for another
 E.g. Farmer provides raw material [hide]  tanners produce leather products 
leather items sold to wholesalers or retailers
 E.g. Farmer  food canning factory  tourist industry

Backward Linkages

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  When the demand of one industry leads to the development of another industry
 E.g. the tourist industry depends on food canning  food canning factory depends on
the farmer.

Advantages of Linkage Industries

 It provides increased employment opportunities resulting in an improvement in the
standard of living of persons employed.
 It assists regional sufficiency this reduces dependence on imported goods.
 Income earned is spent in the economy such as in the hotel industry where a tourist
buys items from local craft vendors.
 It forges closer Caribbean links at social, economic and political levels e.g. Jamaica
buys pitch that is a by-product of oil from Trinidad.

 Examples of industrial linkages in the Caribbean can be seen in the table below. The
industries on the left supply materials for the industries on the right.

Crude oil (refining) Petroleum, plastics, asphalt

Sugar cane Confectionary, rum
Livestock Hides, leather goods
Asphalt Road, buildings
Fruit, vegetables Canning
Iron Steel and metal

5.13. EFFECTS OF GROWTH OF A BUSINESS

 A business growth refers to an increase in size and profitability over a period of time
resulting in a larger and stronger business.
 As the business grows it will have an effect on the following items:

Organisational Structure
 As the business grows the number of departments and managers will increase,
resulting in an increase in the communication network in the organization.

Capital
 An expansion in a business will lead to an increase in the demand for capital which
is needed to finance the day to day activities of the firm.

Labour
 As the business grows there will be an increased need to employ more specialist to
carry out certain functions.

Technology
 As the business grows the technology used, tends to become more sophisticated.
E.g. an outdated computer program has to be upgraded to the latest version.

Potential for Export

 A small firm will meet local demands but as the business expands it looks for
overseas markets to export it goods.

See revision questions below 

Question 1

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 (a) (i) What is meant by the term 'extractive production', give TWO examples of
extractive production. (4 marks)

(ii) Identify TWO examples of service industries in the Caribbean. (2 marks)

(b) Explain what is meant by EACH of the following terms.

(i) Capital intensive production

(ii) Labour intensive production (4 marks)

(c) Differentiate between EACH of the following pairs of terms:

(i) Production and productivity (4 marks)

(ii) Subsistence production and domestic production (4 marks)

d) Identify two features of a small business (2 marks)

[Total 20 Marks]

Question 2

(a) (i) List TWO levels of production and explain the main difference between
them. (4 marks)

(ii) Outline ONE main difference between primary and secondary production

giving one example of EACH. (4 marks)

(b) (i) Discuss TWO features of cottage industries. (4marks)

(ii) List FOUR factors of production. (4 marks)

(c) Define each of the following:

(i) Forward linkage

(ii) Backward linkage (4 marks)

[Total 20 Marks]