ORGANIZATION OF
PRODUCTION
Lecture 2
Prepared by: CPA Mulogo, Eric [MFA-OG, B.Com Acc Hons., CPA(T)]
4 May 2021
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Study objective
 Introduction
 Types of production
 Industry
 Commerce
 Factors of production
 Size and location of firms
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Introduction
A definition of production involves the process by which raw
materials are transformed into a finished good suitable for
sure and delivered to costumers.
Commerce is concerned which one section of this process. It
is a system by which raw materials a distributed to industry
and the finished products to consumers.
Consumer would require a good only if it has an ability to
satisfy his need. This ability good is called utility. Production is
thus a process aimed at creating utility in a good.
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Types of Production

Direct production
This occurs when some one attempt to satisfy his/her want
entirely by his own efforts.

Indirect production
This means specialization in one particular occupation and
the exchange (through the medium of money) of those
good produced and services provided . This may involve
producing goods for export.
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Stages of Production
We many conveniently divide production into two stage:

Industry and

Commerce
The value of the raw materials is increased in each stage.
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Organization of Production
Production
Commerce
Industry
Primary
Extractive
Secondary
Generic
Manufacturing
Aids to Trade
Trade
Foreign
Home
Constructive
Wholesale
Export
Retail
NB: Aids to Trade include Advertising, Banking, Warehousing, Insurance,
Transport and Communication.
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Import
AIDS TO TRADE

Advertising
Consists of non personal forms of communication conducted
through paid media under clear sponsorship. The aim is to inform,
persuade, and remind potential consumers about products or
services available to the sponsors.
Transportation
Is the physical movement of products through a channel of
distribution from product to consumer and among channel
intermediaries
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AIDS TO TRADE (Cont…)

Banking
Is an institution which accepts deposits, safeguards the money so
received make them available to its true owners on demand
advances loans and provide other financial services.

Warehousing
Involves commercial activity of holding and housing goods before
shipment to buyers or before entering into other stages of
production.
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AIDS TO TRADE (Cont…)

Communication
Is the conveyance of information and ideas from one person to
another. That is wholesalers ,retailers, banks, advertisers etc.

Insurance
is aids to trade in which in return for the payment of premium an
insurer agrees to compensate the insured in the event of his
suffering a specified loss. The transfer of goods form one place to
another is not free from loss.
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Industry
Industry deals with the extraction of natural resources and
altering their forms until they are in a state in which
people can use them. It is connected with the production
and preparation of goods and services.
It is that part of business activity, which is concerned with
the extraction, production and fabrication of products.
Industry may be classified into primary and secondary
industries.
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Primary Industry
Primary industry engage in the production or extraction of
raw material, which are used in the secondary industry. They
include workers employed in mining, quarrying, fishing,
forestry and farming the extractive industries.
They are the first producers who handle the gifts of nature.
Primary industry can be divided into two parts namely:
• Extractive and
• Genetics industries.
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Primary Industry (Cont…)
Extractive Industry: for example fishery, Extraction of oil,
gas and coal etc.
Generic industries: those are which are engaged in
reproducing and multiplying certain species of animals and
plants. For example poultry farm, fishing farm, diary farm,
plant
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Secondary Industry
These industries use raw material made available
by the primary industries and transformed into a
store useful form. They include manufacturing
and construction industries.
Secondary
industry
can
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be
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Secondary Industry (Cont…)

Manufacturing Industries :In this industry, material is
converted into some finished goods or semi-finished
goods. For example, textile mills, sugar mills, cigarette
making, pot making, cotton spinning . In these industries
the gift of nature produced by the extractive industries
are transformed into other forms which can be used
either for further production or as raw materials in the
making of other goods.
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Secondary Industry (Cont…)

Constructive Industries: These assemble the already
manufactured goods or semi-finished goods. All kinds of
constructions are included in this industry. For example,
buildings, canals, roads, bridges etc.
House building builders use items such as cement,
timber, bricks, iron, glass etc. which have been
extracted and manufactured.
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Scope and Meaning of Commerce
Commerce is the second component of business. The term
“commerce” includes all activities function and institution, which are
involved in transferring goods, produced in various industries, from
their place of production to ultimate costumers.
It is function of commerce to provide connecting link between the
stages of the process and make the steps from stage as easy as
possible.
Commerce may be categorized into:

Trade and

Aids to trade.
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Trade
Trade is a branch of commerce involving the buying and
selling of goods and services with a view to making a profit. In
other words trade is the whole procedure of transferring or
distributing the goods produced by different persons or
industries to their ultimate consumers.
Trade may be home trade and international trade

Home Trade: This trade, which is carried out within the
country boundaries. It also known as ‘domestic’, ‘local’ or
‘internal trade’. It consists of the retail trade and wholesale
trade.
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Trade (Cont…)
o
Wholesale Trade: is an organization or individual that
serves as an intermediary between manufacturer and
retailer and who facilitates transfer of product and the
title to them.
o
Retail Trade: is the buying of goods in large quantities
mainly form a wholesale and reselling of them in small
quantities to the final consumer. Retailing therefore
involves all activities concerned with sale of products to
buyers who are the ultimate users of those products.
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Trade (Cont…)
Foreign Trade: this consist of all trading activities that involves
exchanges across national boundaries. It is also called
international trade. It includes exporting and importing
o Exporting: When goods or servicers are solid to any other
country it is called export trade.in other words exporting is
the selling of domestically produced products in overseas
markets.
o Importing: Importing is the purchasing of raw materials or
products in other nations and bringing them into one’s own
country.

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Aids to trade
Aids to trade are those auxiliaries, which help the
smooth running of trade.
They include bank insurance, warehousing, transport,
advertising communication. Without these services,
trade would be very difficult indeed.
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Why Study Commerce?
Briefly commerce should be studied because:
Everyone is involved in commerce either buying or selling

Modern commercial method can be difficult to understand.

Consumer to understand marketing techniques

Everyone makes
important

It is necessary to understand changes in the commercial world as
they affect us.

It is a useful introduction for these who with to specialize later on
any of the components of commerce e.g. insurance, banking,
clearing and forwarding agents Hotels Management etc.
contract and commercial knowledge may be
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Forms of Production
Economics from which we borrow the knowledge of commerce recognize three different forms of
production in relation to goods

Changing the form of a commodity
This means taking raw materials and turning them into finished articles. This is the sort of
production we all easily recognize.

Changing the situation of production
There are concerned with the transfer of goods from their place of manufacture to their place of
consumption.

Changing the position of the commodity in time
Most people would regard only the changing of the form of the commodity as being a productive
process, but production is not really completed until the goods have reached the people who
actually want to consume them, so that the geographical situation of a commodity or the time of
its availability are essentially the final stages of production and economically they are equal
importance to changing raw material into finished production.
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Classes of Goods

Consumer goods
These are the goods, which are desire for its own sake. They are in
the form of which consumers wish to have them e.g. a shirt would
be used by a consumer directly.

Producers (capital) goods
These are not desired for their own sake but only to assist the
production of consumer goods e.g. machinery, raw materials,
factory, building etc. They wear out and have and have to be
replaced.
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Factors of Production
Factors of Production Is an economic terms that
describes the input that are used in the production
of goods or services in order to make an economic
profit.
The five factors of production include land, labor,
capital, organization, modern technology and
entrepreneurs. Without them no production would
be possible.
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Size and Location of Firms
The firms can make decisions to operate as small or
large. Each of these decisions tend to be justified
by a number of reasons.
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Economies of scales (large scale firms)
This is the reduction in cost per unit that results from lagerscale operations. There tendency for the scale of production
to increase among business people. One of the main
features of industrial development is increase in the size of
the business unit.
Reasons for economies of scale
Better use modern equipment, economy in administration,
specialization, advertising, research, economies in buying
and staff welfare
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The Small Scale Firms
The small scale firms exist for several reasons: Lack of capital
 Possibility
 Simplicity in management
 Limited liability
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Factors affecting the location of
industry
•
Industries are not everywhere; there is places where
industries are concentrated while other places have no
industries at all what causes this?
•
Assuming that the principle aim of the firm is to
maximize profits, it will always endeavor to locate its
establishments at the lowest cost of production.
The following factors will affect the location:
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Factors affecting the location of industry

Raw Materials: Are the ones to be transformed or processed into
finished products. Raw materials include gold, tin, oil, uranium
etc. when they are present, they attract industries at that place.

Marketing: Industries are likely to be established in big cities and
towns where people are concentrated. People forms the market
for industrial products since the can buy industrial products and
facilitate the production process to move on.

Fuel and Power: Source of energy provide the energy necessary
for the functioning of machines in the industry. Sources of energy
include oil, natural gas, uranium, wood, hydroelectric power, solar
energy, biogas, etc. some of them are renewable while others are
non-renewable.
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Factors affecting the location of
industry

Labor: industries require both skilled labor or normal
labor. Areas where people are concentrated are well
indicated for creation of industries because such areas
avail labors for industry. Areas where people are
concentrated, workers are cheap and available.

Good transport network and communication: transport
network facilitates import of raw materials and export of
finished products from the industry to the market.
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Factors affecting the location of
industry

Government influence: industries have tended to locate
themselves in towns such as Dar es Salaam, Mwanza and Arusha
regions in Tanzania.

Location near a firm that provides an input: a sweets industry, for
instance, should be located near the Sugar industry.

Land: may not be a very important factor in terms of a firm’s
location, though its availability may effect industry location in
certain instances. Chosen site should be reasonable cheap and
potentials for expansion needs to be provided for.

Water: some firms require water as one of their inputs. Such
firms, when located where there is an adequate supply of water,
may have reduced production costs.
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Factors affecting the location of
industry

Government policy: industry develops from an area where the
assistance of the local government can be found. This assessment
can include investments in terms of capital, even location of
industries in the country search of market outside for industrial
products.

Site requirement: Some modern industries require particular
types of site. For example an integrated steelworks needs a large
area of flat land, while a chemical plant may need a site where it
is possible to dispose easily of dangerous waste.
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Factors affecting the location of
industry

Climate: the geology of the area need to be considered together
with the climate conditions(Humidity, Temperature and
atmosphere).Changes in weather conditions highly affect business
activities operating in agricultural sector.

Amenities: allocation should provide for good external amenities
e.g. shops, housing, community services, communication system
etc.

Safety requirements: some production units may present
potential dangers to the surrounding neighbor hood.
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Factors affecting the location of
industry

Special grants, regional taxes and import/support barriers: certain
government and local authorities often offer special grants, low
interest loans low rental or taxes and other inducements in the
hope of attracting industries to particular locations.
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