GCSE/O Level/ IGCSE commerce- production chapter

Production

.1.1.1 Production

Manufacture of goods & provision and delivery of services

Needs and Wants

Needs are the things necessary for living, that is food, shelter and clothing.
Wants are those goods and services which are not compulsory for living but makes life easier.

What is commerce?

Commerce is study related to distribution of products from the producer (point of production) to the consumer (point of consumption).

Products, Production, Producer and Consumers

Products are the goods and services produced by a company, to satisfy needs and wants of customers.
Production is any activity which serves to satisfy human needs and wants.
Producer is a person or company who produces products to satisfy need and wants.
Consumers are the ultimate users of goods and services produced.

No	Goods	Services	Explanation
1	Ownership is not transferred	Ownership is not transferred	When buying a service, the service ownership is not transferred to the end customer. If you buy a car then the car is yours. But if you buy a ticket for an airline, then the airline is definitely not yours
2	Tangible	Intangible	In a restaurant, the dish can be measured, but the efforts gone in making the same dish by two different chefs cannot be measured from the customer end
3	A physical commodity	Activity or a process
4	Homogenous	Heterogeneous	All services face an uphill problem in maintaining consistency
5	Can Store	Cannot Store
6	Production and distribution are separate from their consumption	Production and distribution and consumption are simultaneous process.	Customer involment is there

1.1.2 Factors of production

Factors of production are an economic term that describes the inputs that are used in the production of goods or services in order to make an economic profit.

The factors of production include land, labor, capital and entrepreneurship.

·         Land

Land represents all natural resources, such as timber and gold, used in the production of a good.

·         Labour

Labor includes all of the work that laborers and workers perform at all levels of an organization, except for the entrepreneur

·         Capital

Capital is made up of all of the tools and machinery used to produce a good or service.

·         Enterprise

The entrepreneur is the individual who takes an idea and attempts to make an economic profit from it by combining all other factors of production. The entrepreneur also takes on all of the risks and rewards of the business.

1.1.3 Industrial sectors and commerce’

The chain of production

Production is the process and methods used by producers to transform inputs such as raw materials, semi-products goods and even ideas information and knowledge into good and services.

Eg: farmer prepares the ground, plants seeds, harvests the crops and sells this output to others. Similarly, a manufacture may buy the harvest of the farmer, process it in some way and then sell it to someone else who will market the end product that eventually reaches the consumer.

There are links between the production levels. This links show the chain of production.

Chain of production refers to the steps that must be taken to transform the raw materials, ideas and so on, into finished product that can be used by consumers.

Types of production

Production can be divided into three clear categories:

·         Primary production

·         Secondary production

·         Tertiary activities

Primary Production

Primary production is about the extraction of basic materials provided by nature, which are either above or below the earth’s surface.

The extractive industries are farming, fishing and mining. There would not be uch more production without these industries.

·         Farming: involves food production in the form of fruit, fowls, animals and plants and also other produce such as threes and flowers.

·         Fishing: plays a major part in providing food for countries that have access to sea, ether for domestic use or for selling to other countries. Deep-sea fishing is carried out in the open sea. Protected fisheries are a developing industry that ‘farm’ in inland lakes and reservoirs and even in the coastal waters of some countries.

·         Mining involves the extraction of raw materials such as fossil fuels, oil and gas, ore and so on, from below the earth’s surface.

Secondary Production

Secondary production consists of the manufacturing and construction industries. They take the materials produced by the extractive industries and change them into an end product.

·         Manufacturers: may be involved in the production of a complete item, or they may make parts that will be assembled into finished articles.

·         Construction: industries take the raw or partly processed materials of primary producers and change them into buildings, roads, bridges and so on.

Tertiary activities

Tertiary activities also a form of a production because they enable the change of ownership of goods and services.

Tertiary activities begin when goods leave the producer. Such goods do not usually pass directly to the consumer (the ultimate purchaser).

Goods can be transported, stored, insured, advertised and sold by trader on the open market. Tertiary activities are sometimes called the service industry, but more often they are referred to as commercial services and direct services.

The relationship between businesses in the primary, secondary and tertiary sector

Elements of chain of production interdependent.

Primary production needs manufactures to use their output, and production cannot take place without the raw materials provided by primary production. Similarity, tertiary services are the important link between all types of producers and the market their output.

We, as consumers, could not specialized in the variety of work we engage in if others were not creating the food and clothes we need and the mechanism was not there to enable us to buy them.

Form this it is visible that industry and production cannot exist without commerce and commerce cannot exists without production; they are interdependent.

The relative importance of each sector within countries.

At each stage in the chain of production and distribution, the cost of goods or services is increased. Farmer sells at a price that includes his profit, the manufacturer adds to the price when the goods are sold to the retailer, and retailer adds further to the price when the goods are sold to the consumer.

*Discuss about the added value.

1.1.4 Division of labour

Specialization

Specialization occurs when people focus on carrying out a particular task. They do what they do best in exchange for money, and then use the money they earn to buy the goods and services they need.

Many working people are specialist of some kind. For example engineeres, nurses, teachers etc.

Specialization takes place at many levels as well as the level of individuals,

Eg:

·         Business tend to specialized in a specific part of the market

·         Individual towns in a county may specialize so they can exploit local resources in a region. (tourism)

·         A whole country may specialize in areas where it has a comparative advantage owing to its resources.  Pakistan – cotton and linen

Advantages of Specialization

·         Concentration on work increases.

·         Increased output per worker.

·         Mechanization can occur.

·         Economy of scale can be achieved (low average cost of product).

·         Less time consuming.

·         Better quality of products.

·         Mass production.

·         Saving of tools and equipment.

·         Skills in particular field develops.

Disadvantages of Specialization

·         Work becomes boring.

·         Interdependency increases.

·         Decline in craftsmanship.

·         Machinery replaces labor.

·         Standardized output, choice of customers decreases.

·         Demotivated staff.

Division of labour

Division of labour occurs where production, or an aspect if its operations, is broken down into several tasks or stages.

A limited range of tasks are assigned to workers within the production process.

Eg: in clothing factory  complete production line may involve many workers, with each one making their individual contribution to the end product.

By organizing production into many stages or processes, workers specialize and become more proficient in their work through repetition.

Consequently, output per person raised. This increased productivity can result in lower unit costs and thereby lower prices for consumers.

Advantages of division of labour

·         Workers become more expert in their jobs

·         Jobs become simpler and easier to learn

·         Output per person increases.

·         Workers can change jobs more easily.

·         Machinery and automation can be used.

·         Unit costs are reduced.

Disadvantages of division of labour

·         Repetitive and limited tasks can become boring.

·         Individual crafts may be lost through mechanization.

·         Greater use of mechanization can result in unemployment.

·         Production can easily be disrupted by strikes

·         Slow workers may be unable to keep up with other.

Specialization and the need for commerce

When goods leave the producer they do not usually pass immediately to the consumer. Instead they tend to pass through intermediaries.

They have to be stored, transported insured, advertised and sold by traders.

This movement of good of services through to the final consumer is called chain of distribution. Tertiary production is sometimes called the service industry, but more often referred as commerce or direct service.

Commerce

Commerce referred to buying and selling of goods and services.

 It can be divided into two clear areas

·         Trade

·         Aids to trade.

Trade

Trade is the process of changing ownership.

Traders are businesses directly involved in the buying and selling of goods and services.

Trade can take place within the country (home trade) or outside the country (foreign trade).

Home trade involves activities of wholesalers and retailers. Foreign trade involve activities of imports and exports.

·         It enables specialization to take place – producers can concentrate what they do best and get the benefit.

·         It facilitates increased development so that the whole economy grows.

·         It provides areas and countries with products and services that they otherwise not have access to.

·         It helps a country to exchange its surplus with the surplus of other countries.

·         It encourages corporation between sectors and also with other countries.

·         It facilitates the exchange of technology between industries and between countries.

Aids to trade

The aids to trade are also referred to as indirect services. They are commercial activities that assists trade in its jobs of selling goods and services.

Banking and finance

·         Short term finance and facilities for easy payment transfer.

·         Finance is sourced through various commercial institutions providing long term finance for commerce and consumer credit.

Communication

·         Way of sharing information between people within the organization, between organizations and between organizations and its customers.

·         Communication can be oral, written, telephone or electronic, including fax, internet, intranet, email, teleconferencing and videoconferencing.

Advertising

·         Advertising is a form of communication.

·         It provides potential customers with information about goods and services and can lead to increased sales.

·         Advertising is also used to increase public awareness about issues of national concern, for example, health and safety.

Transport

·         Transportation is important to all parts of the chain of distribution.

·         It is the physical movement of commodities from one place to another.

·         Aim is to get the goods from one place to another, on time and in good condition.

Warehousing

·         Plays a crucial role in the supply chain as a centre point in the chain of supply, linking flows of goods between suppliers and customers.

·         Warehouse hold raw materials, component parts, part-finished products and finished goods at or near where they are needed, in safe and appropriate conditions.

Insurance

·         Spread the risk faced by industrial and commercial business.

·         It protects business from the damage effects of financial liability arising from unforeseen circumstances such as theft, fire or flood.

·         Having the security of insurance means that a business does not need to keep large amount of money to one side to cover it in the event of such losses.

Direct Services (personal)

·         There are many other services that support industry and commerce, even though they are not directly involved in the chain of production or change of ownership of goods.

·         These are the people and business that provide us with direct services, so called because services are offered direct to the consumer.

·         Eg: teaching, nursing, hairdressing, consult services, entertainment and many more such direct personal services.

The interdependence of countries

·         Industries need each other for the goods and services each provides.

·         Eg:  tourist industry, depends on the agricultural industry for supplies of food and so some farmers sell their products

·         The tourist industry is an important earner of foreign currency; the banks depends on the earnings from tourism in order to meet the needs of individuals who, like businesses, require foreign currency to purchase raw materials or machinery from overseas.

·         Traders support producers by carrying out the distribution of goods and bridge the time gap between production and consumption. Eg: retailers and wholesalers order goods from producers and hold the goods until they are required by consumer.

·         Exporters are involved in the distribution of home good overseas. This provides work for producers and also raises foreign capital

·         Importers buy from other countries the raw materials and finished goods that cannot be produce economically at home.

·         The services or aids to trade, also plays a major part in combining the activities of producers and promoting their enterprise.

·         Finance provides the money for capital assets needed by business, and also for consumers and businesses who wish to buy on credit.

·         Banking ensures the transfer of payments between buyers and sellers of goods, and also provides other services to facilitate the payments.

·         Insurance overcomes some of the risk involved in producing and trading, such as the danger of loss or damage to capital assets of goods.

·         Transport makes the physical link between producers, traders and consumers and gets goods to the right place, at the right time and in the right condition.

·         Advertising helps producers and traders to bring their commodities to the attention of their potential customers.

·         Communication systems enable business to communicate with each other and their customers at the various stages of production and distribution.

·         Direct services also have an important relationship to industry and commerce. Eg: educators help us to attain skills that are needed by employers in industry and commerce, and medical staff help keep us fit to work.

·         Entertainer contributes to our wellbeing and consultants offer advice in variety of forms.

·         All of these, and many others, contribute ‘indirectly’ to the success of industry and commerce by providing ‘direct’ services.

Commercial activities are essential to production, but many of the commercial activities would not be needed if it were not for producers and specialization making exchange necessary. In other words, primary, secondary and tertiary production are inter-related and interdependence.