The production process
Production means using resources to make goods and services. A firm uses the factors of production — land, labour, capital and enterprise — and turns them into output. For example, a bakery uses flour, workers, ovens and business decisions to produce bread and cakes.
1. Demand for factors of production
Firms demand factors of production because they need them to produce goods and services. A business will only employ more workers, buy more machines or use more raw materials if these resources help it produce goods that customers want to buy.
Land
Natural resources such as land, oil, water, forests and raw materials.
Labour
Human effort used in production, such as workers, managers and technicians.
Capital
Man-made resources such as machines, tools, buildings and vehicles.
Enterprise
The skill of organising resources and taking business risks.
Derived demand
Derived demand means demand for a factor of production comes from demand for the final good or service it helps to produce. For example, if demand for houses rises, construction firms may demand more builders, cement, bricks and machinery.
Easy rule
If demand for the final product increases, demand for the resources used to make it usually increases too. If demand for the final product falls, demand for those resources may also fall.
2. Labour-intensive and capital-intensive production
Firms must choose the best mix of labour and capital. Some production methods use more workers. Others use more machinery and technology.
| Production method | Meaning | Examples |
|---|---|---|
| Labour-intensive production | Uses a high proportion of workers compared with machines. | Fruit picking, tailoring, restaurants, cleaning services and handmade crafts. |
| Capital-intensive production | Uses a high proportion of machinery and equipment compared with workers. | Car manufacturing, oil refining, chemical production and automated factories. |
Reasons for using capital-intensive production
- Large-scale production: machines can produce a very high output.
- Consistent quality: machines can make products more accurately and with fewer mistakes.
- Lower long-run costs: although machines are expensive at first, average costs may fall when output is high.
- Labour may be expensive or scarce: firms may use machines when workers are costly or difficult to find.
Reasons for using labour-intensive production
- Labour may be cheaper: in some countries, workers cost less than machines.
- Human skill is needed: some products require care, creativity or personal service.
- Lower start-up cost: small firms may not be able to afford expensive machinery.
- More flexible: workers can often switch tasks more easily than specialised machines.
3. Production and productivity
Students often confuse production and productivity, but they do not mean the same thing.
| Term | Meaning | Simple example |
|---|---|---|
| Production | The total amount of goods and services produced. | A factory produces 10,000 bottles in a day. |
| Productivity | Output produced per unit of input, such as output per worker or output per machine. | Each worker produces 100 bottles per day. |
Simple difference: production measures total output. Productivity measures how efficiently resources are used.
4. Why higher productivity is important for an economy
Higher productivity means an economy can produce more output from the same amount of resources. This is important because it can raise living standards and make firms more competitive.
- Lower average costs: firms can produce more efficiently, which may reduce prices.
- Higher output: the economy can produce more goods and services.
- Greater competitiveness: firms may compete better with foreign producers.
- Higher incomes: productive workers may earn higher wages over time.
- Economic growth: more output can increase national income.
5. Factors influencing productivity
Investment
Investment in better machinery, tools, buildings and technology can help workers produce more in less time.
Innovation
Innovation means finding better products, better methods or better organisation. It can reduce waste and speed up production.
Skills and expertise
Education, training and experience improve workers' ability to use equipment, solve problems and produce higher-quality output.
Quick exam check
- Derived demand: demand for factors comes from demand for the final product.
- Labour-intensive: more workers are used than machines.
- Capital-intensive: more machinery is used than labour.
- Production: total output produced.
- Productivity: output per unit of input.