LECTURES 13 & 14
PRODUCTION
Factors of Production
The term ‘factors of production’ refers to the resources that are combined in the production
process to create goods and services.
These are:
Land - natural resources
Labour – human resource
Capital – man made resource
Entrepreneur – human resource
Land includes all natural resources such as soil, seas, rivers, forests, minerals, vegetation etc.
Labour is categorized as skilled, semi-skilled, unskilled or professional workers
Capital includes assets such machinery, equipment and vehicle owned by the company. Capital
also includes raw materials, finished and semi-finished, goods, bank and cash balances.
Entrepreneur is the owner and risk taker in a business venture. He is responsible for combining
all the factors of production.
Industries Developed from Natural Resources in the Caribbean
Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.
Examples:
Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and earns
foreign exchange for the country.
Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.
Bauxite is found in abundance in both Jamaica and Guyana. The Alumina industry is an
important foreign exchange earner. Alumina is exported to be further processed to make
aluminium products.
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CHAPTERS 13 & 14
PRODUCTION
Factors of Production
The term ‘factors of production’ refers to the resources that are combined in the production
process to create goods and services.
These are:
Land - natural resources
Labour – human resource
Capital – man made resource
Entrepreneur – human resource
Land includes all natural resources such as soil, seas, rivers, forests, minerals, vegetation etc.
Labour is categorized as skilled, semi-skilled, unskilled or professional workers
Capital includes assets such machinery, equipment and vehicle owned by the company. Capital
also includes raw materials, finished and semi-finished, goods, bank and cash balances.
Entrepreneur is the owner and risk taker in a business venture. He is responsible for combining
all the factors of production.
Industries Developed from Natural Resources in the Caribbean
Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.
Examples:
Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and earns
foreign exchange for the country.
Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.
Bauxite is found in abundance in both Jamaica and Guyana. The Alumina industry is an
important foreign exchange earner. Alumina is exported to be further processed to make
aluminium products.
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Guyana also has very large forest areas and has developed a very vibrant lumber and timber
industry. Lumber is used in the construction industry.
Limestone is processed to make cement in Jamaica.
Difference between Production and Productivity
Production is the process of combining units of inputs (natural, man-made and human resources)
to create output (goods and services) capable of satisfying human needs and wants.
Productivity is the increase of output from each unit in the production process. There are several
ways of achieving productivity. These include the training of workers and the introduction of
machinery and equipment into the production process.
Importance of Productivity
Productivity increases output. High productivity results in lower cost per unit of output resulting
in higher levels of profit for a business. For example, a factory worker can produce 10 items in
an hour and he subsequently produces 20 units in the same hour after some training. His
productivity has doubled and the business will benefit from a fall in unit cost as more units are
being produces at the same costs of production.
Higher profits for the firm will mean more funds available for its expansion, new business
ventures and community support. It may also wish to pass on the benefits of lower costs to
consumers in the form of lower prices.
Labour Productivity = Output / Number of employees = 200 watches/ 10 employees
= 20 watches per employee.
Effects of Migration
Migration is the permanent movement of workers from one location to the next in search of
better opportunities.
Internal Migration
Migration within a country e.g rural –urban migration. This is migration of persons from rural
communities to the city areas.
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External Migration
Migration of persons from one country to another – For example, the migration of Caribbean
people to developed countries such as the United States and England.
Effects of Migration
Internal (Rural –Urban migration)



The loss of persons from rural areas impacts on the level of output and development of these
areas.
It also impacts negatively on the level of commodities available for export form these
regions.
The influx of workers in urban areas increases competition for jobs, houses, health facilities,
schools etc.
External Migration (Caribbean to developed countries)
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


Professional and skilled workers who migrate reduce the level of skills available in their
countries resulting in a brain drain effect. This will impact on growth and development.
They increase competition for jobs, houses, health facilities and schools in their new
territory.
Money earned by Caribbean nations in foreign countries is sent home to support their
families reducing poverty and making foreign exchange available for their respective
countries.
Caribbean professional and skilled workers contribute to the growth of developed countries
Role of the Entrepreneur: Decision Making Process
The entrepreneur organizes the factors of production to create goods and services. The most
suitable location, qualified workers, and the right equipment and machinery will ensure efficient
production. It is therefore important for him to make the right decisions concerning the
employment of the required resources for his business. He must also make decisions on systems
and processes to be applied in the production process.
Role of Capital in Production
Capital refers to assets such as machinery, equipment, inventory and cash that are used to start
and continuously operate a business.
Fixed capital includes machinery, equipment and vehicles owned by the company. These assets
are so called because they cannot easily be turned into cash.
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Circulating capital or Current Assets includes raw materials, finished and semi-finished,
goods, bank and cash balances. These assets can easily be converted into cash.
Tools and machinery are necessary for products to be fashioned from raw material e.g. mineral
mining, oil drilling and lumbering. These assets also increase productivity for example sewing
with a machine as opposed to sewing by hand. Venture capital is needed for business start-up.
The business owner will need equipment, funds for promotion etc. to start the business.
Working capital is the cash available for the daily operation of the business. It is used to pay
workers, utilities and purchase raw materials.
Levels of Production
Subsistence
This is the lowest level of production. Subsistence productions refers to output from the
production process that is just enough for the survival. This amount of production is therefore not
adequate to meet all needs and wants of a family, community or a country. For example,
subsistence farming involves the production of crops to feed the family and for survival. Wealth
is not created as whatever is produced is consumed.
Domestic Production
Domestic production refers to production that is more than survival level. It provides output that
is enough to satisfy domestic needs and wants. Excess is not available for export. However,
production is adequate to supply local demand.
Examples include:


Use of local forest resources to obtain lumber to produce furniture for domestic use.
Use of daily catchments of fish to prepare local dishes to be consumed by the citizens
Surplus or Export
This level of production is adequate to supply local demand and for export. Large industries can
produce large quantities of output to satisfy local consumption and earn foreign exchange from
export, for example, the sugar and banana industries.
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
Trinidad and Tobago produces crude oil for export
Jamaica and Guyana Produces bauxite for export
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Types of Production
Primary Production
This includes all kinds of extractive industries such as agriculture, mining, forestry and fishing.
Secondary Production
This is the second stage of production after extraction from the natural resources. It involves
converting raw materials into finished goods. This includes manufacturing such as assembling,
baking, refining and construction (building) industries.
Tertiary Production
This is the final stage which can be classified into Direct Services such as hairdressing,
babysitting and secretarial work and Commercial or Indirect services such as banking,
insurance and advertising. Service industries include transportation, communication and tourism.
Cottage Industry
Cottage industry is a generic term for any type of home–based production business. The term is
specifically used to describe industries of a craft nature e.g. basket weaving, carving and pottery.
This type of home–based business is not difficult to start as it requires little capital to purchase
tools and employs family members. These small scale businesses are important to an economy.
They utilize local raw materials such as clay for pottery, wood for carving and straw for baskets.
They earn foreign exchange from selling to tourist at craft markets and fairs. Examples also
include:
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Food Items – pastries, jams and jellies
Personalized services- sewing, hairdressing.
Importance of Cottage Industries:
1.
2.
3.
4.
5.
6.
7.
Provide employment
Satisfy psychological need of the producer
Adds to family budget
Provides an opportunity to use one’s skills
Uses local materials
Improves skill base
Help to boost foreign exchange
Factors required for cottage industries to survive:
1. Materials must be readily available.
2. Training programmes must be readily available to pass on skills
3. Financial support through loans with low interest rates.
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4. Supported by trade shows.
Linkage Industries
This refers to industries that are connected because they depend on each other to obtain or to sell
raw materials i.e. the output of one industry (finished product) is the input (raw material) of the
other industry.
Forward Linkage
If the final product or finished products of one industry is used in another industry as its raw
material then a forward linkage occurs. For example, sugar produced from a sugar factory is used
by a bakery to make pastries. Sugar is therefore the end product of one industry and used as raw
material in another. Other examples include agriculture and canning, lumber and construction
and cattle farming and meat processing.
A backward linkage occurs when the demands of an industry leads to the establishment of other
industries to produce for the needs of this industry. For example, the establishment of several
multinational fast food restaurants in the Caribbean has led to new businesses being established
to supply these restaurants with raw materials (vegetables, ground provisions, meats and paper
based products).
Benefits of Linkages:
1.
2.
3.
4.
5.
Economic ties creates more job opportunities
Promotes innovation and use of new technology
Encourages large scale production for local and export demand.
Promotes cooperation
Leads to increased household incomes and foreign exchange.
Impediments of Linkages:
1. Lack of Venture Capital for primary sector development
2. Limited access to foreign markets
3. Investment in equipment and machinery can be expensive.
Factors that determine Business Location
The location identified for the operation of a business will impact on its success or failure. An
unsuitable location can result in high operational costs or low sales volume. Business owners
must therefore consider the following factors when choosing a location.
Geographical Factors
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Climate, geology and terrain can determine the location of an industry.
Cool Climate for Coffee in Jamaica, Sea for fishing and Tourism in Antigua and St. Lucia.
The proximity to customers
It is important that business owners give customers easy access to goods and services. Shopping
plazas in very central locations are very popular locations for businesses. Many companies now
opt for selling online and therefore do not need to be centrally located.
The proximity to raw materials
It is more cost effective for a business that uses raw materials that are heavy and or bulky to
locate close to the source of raw material. For example, bauxite processing plants are located
close to mining areas and sugar factories are located close to sugar fields.
Availability to suitable labour supply
A business will need adequate number of workers who possess the skills suitable for the creation
of its goods and services. The availability of health facilities will also ensure a healthy
workforce.
Adequate Infrastructure
Firms will locate where there are adequate supplies of water, lighting, airports, seaports, good
roads, transportation, and communication facilities. Failures in any of the utilities and
infrastructure can severely hamper operations.
Government Regulations

Government may want to develop certain locations in line with their developmental plans as
opposed to protected natural areas.
Functions of a Small Business

Supplying goods and services that satisfy demand
Identifying a particular need in a market and developing a product that will supply that market
need, improves standard of living and increases the overall revenue (GNP) earned in a country.
Small businesses have the advantage over large businesses to identify changing market trends as
they are closer to the customers. They are also able to produce unique products to suit the needs
of each customer.
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
Creating employment
Small businesses account for a large percentage of total employment in Caribbean economies.

Making profits
The main purpose of starting and operating a business is to make profits. Profit makes it
worthwhile for the entrepreneur to continue business. Profit earned may be reinvested to expand
the business.
Small Business
Advantages
 Less layers of Management
Disadvantages
 Unlimited liability

Personal interaction with clients

Difficult to access financing

Less complicated to start

High risk due to economic pressures

Able to source government assistance

Unable to compete with cost savings

Can cater to niche markets better
Large Business
Advantages
 Easier to access financing
Disadvantages
 Greater bureaucracy

Experience economies of scale

Increased barriers to communication

Able to spread risk

Inflexible to market due to standardisation

Able to invest in R&D

Impersonal dealing with clients
Effects of Growth on a Business
Small businesses that are efficient, creative and are cognizant of changing market trends are
poised for growth. Growth impacts on the business organizational structure and the business
operations.
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The creation of new posts and departments as a result of specialization and expansion will
change the organization’s structure. More workers will also be employed resulting in greater
specialization or division of labour (more workers will mean that tasks can be subdivided into
smaller tasks).
There will also be an increase in the internal communication systems (telephone, mail etc.) to
accommodate this expansion. More factory and office space, equipment and furniture will be
required to facilitate expansion.
As the business expands it can take advantage of economies of scale. Economies of scale refers
to the benefits that firms are able to enjoy because of expansion.
Internal Economies of Scale
This refers to the benefits enjoyed by a firm because of its own expansion. These include:
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Technical Economies of Scale - Expanding businesses will need to purchase machinery and
equipment to supply the level of output required. With the use of machines productivity will
rise and the firm will experience technical savings as unit cost of production will decline.
Marketing Economies – Expanding businesses can take advantage of bulk buying and
receive discounts on raw materials.
Financial Economies -Larger firms will access loans more easily and at a cheaper interest
rate than small firms since they already have established reputations and adequate collateral.
Managerial Economies -The employment of experts who will specialize in various
management functions such as marketing, personnel, accounting and production will increase
efficiency and thus output.
External Economies of Scale
External economies refers to the benefits enjoyed by a business because it is part of a wellorganized industry and not because of its own expansion. Thus any businesses whether large or
small can reap these benefits as long as it is part of an industry enjoying these benefits. Benefits
include; government subsidies offered to particular industries, tax holidays and reduced duties on
items imported.
Internal Diseconomies of Scale
A diseconomy of scale refers to the disadvantages arising from the expansion, such as:
1. High Advertising Cost: This becomes a diseconomy when the percentage increase in a firm’s
advertising cost is much greater than the percentage increase in its revenue.
2. High maintenance cost for machinery and equipment.
3. Increased difficulty in controlling the organization.
External Diseconomies of Scale
1. Shortages of Raw materials
2. Decline in the Industry
3. Negative externalities such as pollution can affect businesses
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Internal Growth
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Expanding plant and equipment to full capacity
Increasing plant size
Creating or expanding product lines
External Growth
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Horizontal mergers or vertical mergers
Formation of a conglomerate through the assembly of multiple businesses in the same
industry.
Takeovers
Impact of growth on:
1.
2.
3.
4.
5.
6.
Organisational structure
Capital
Labour
Scale of production (economies of scale)
Use of technology
Potential for export
Economical and Social Implications of Technological Development
Technological development increases the quality and quantity of output. This results in the
lowering of unit cost of production which may be passed on to consumers in the form of lower
prices. When goods and services become more affordable the standard of living of citizens will
rise.
Developing countries employ both labour and capital intensive methods of production. Labour
intensive industries include banana and craft and capital intensive industries include petroleum
and bauxite.
There are three methods of production:

Labour Intensive Production
This method of production utilizes mainly manual labour along with a limited amount of
machinery

Capital Intensive Production
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This method of production utilizes mainly machinery along with a limited number of workers.

Automation
Automation is the employment of machines in a continuous process of operation. This is the
further stage of mechanization. This production process is carried out automatically with little or
no human involvement. For example, the automated teller machine (ATM).
Mechanisation
This is the substituting of human and animal labour with machines such as robotics and
computers to produce more effectively.
Computer Aided Design (CAD)
Computer aided design is a computer software used in the product design process to produce
designs with greater accuracy, speed and flexibility. Its powerful computer graphics allow
product designers to produce 3-dimensional objects, which can be fully examined and tested
before they are implemented.
Advantages include:
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


accuracy
speed
it is easier to make adjustments since changes are made on the computer
reduces cost of the design process
Computer Aided Manufacturing (CAM)
This involves the use of computers in a variety of manufacturing tasks. Computers are used to
coordinate every aspect of production, from design through stock control to production
scheduling and control. Benefits are increased productivity, reduction in waiting time, greater
consistency, greater flexibility, and improved coordination of operations, direct and flexible
control of tools and materials, and continuous flow of operations.
Computer Aided Instruction (Instructional or Teaching software)
Software application designed to instruct users on procedures and methods. It involves selfpaced and interactive instructions with on line testing and feedback. It identifies areas of
weakness and provides remedial work until the learner understands. Teleconferencing is
possible.
Mechanization and Automation results in increased output but reduces the amount of labour
required in the production process. This creates unemployment in Caribbean countries. Workers
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must be retrained for new developing industries such as information technology. New industries
will absorb the fall out of workers from other industries.
Advantages and Disadvantages of Automation and Mechanisation
Advantages
 Increase productive capacity in a shorter
time
 Reduce labour cost
 Reduction in defects
 Minimal need for supervisors
 Increased support to tertiary services
Disadvantages
 Increased unemployment

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High initial investment
High maintenance cost
Technical disruptions
Can only be used for large or standardised
output
Machines become obsolete and depreciate
Implications of change from labour intensive to capital intensive:
1.
2.
3.
4.
Standardised products
Increased outputs
Greater efficiency
Fewer people employed
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