1.
Meaning of Production
In economics, production refers to the process of making goods or services that have value and
satisfy human wants or needs. It involves combining various resources—such as land, labor,
capital, and entrepreneurship—to transform inputs (like raw materials and labor) into outputs
(like finished products or services).
The goal of production is to generate utility, which means making something useful or desirable
for consumers. Production is a fundamental economic activity because it drives economic
growth, provides employment, generates income, and supports trade. Economic production can
include everything from manufacturing products to providing services, as long as these
activities create value and involve market exchange.
In essence, production in economics isn't just about "making things"—it's about generating
value in ways that benefit society and contribute to the economy.
2. Types of Production
There are three primary types of production, each of which serves a unique role in the economy:
• Primary Production: This involves extracting natural resources directly from nature.
Industries like agriculture, mining, forestry, and fishing are part of primary production.
These activities provide raw materials that other industries rely on.
• Secondary Production: Also called the manufacturing sector, secondary production is
about transforming raw materials into finished or semi-finished products. This includes
manufacturing, processing, and construction. Examples include converting wheat into
bread, iron ore into steel, or raw cotton into clothing. Secondary production adds value
by creating usable products from raw resources.
• Tertiary Production: This sector provides services that support the production and
distribution of goods. Tertiary production includes transportation, banking, insurance,
healthcare, education, and government services. These services make it possible for
goods to reach consumers and for companies to operate efficiently. Tertiary services
are essential to all stages of production and distribution.
3. Factors of Production
Production depends on four essential resources or "factors of production," each with distinct
roles, characteristics, and compensations:
a. Land
• Definition: In economic terms, "land" includes all-natural resources, such as soil,
minerals, forests, and water bodies, which are used in production.
• Characteristics:
o Fixed Supply: The total land available on earth is limited, meaning it’s a scarce
resource. Although specific locations can sometimes be expanded (e.g., land
reclamation projects), the total amount of land doesn’t change significantly.
o Alternative Uses: Land can be used for various purposes, such as agriculture,
housing, factories, or public spaces. Decisions about land use impact economic
activity and resource allocation.
No Cost of Production: Since land is a natural resource and wasn’t created by
o
human effort, it has no direct production cost. Income earned from land is called
rent, which can increase due to demand or scarcity but doesn’t involve initial
creation costs.
o Differences in Fertility: Not all land is equally productive. Agricultural land
with fertile soil, for instance, will yield more crops than land with poor soil.
• Compensation: The income received from land is known as rent, which varies based
on demand and the quality of the land.
b. Labor
• Definition: Labor encompasses all human effort, both physical and mental, directed
toward producing goods and services. Labor can include skilled and unskilled work,
from manual labor to managerial and intellectual roles.
• Characteristics:
o Human-Centered: Labor is unique because it’s provided by people, who have
needs, emotions, and rights.
o Perishable: Labor cannot be stored or saved for future use. If a day’s labor isn’t
used, it’s lost forever.
o Dual Role: Laborers are not only producers but also consumers, making their
well-being important for economic stability.
o Inseparable from the Worker: Labor is unique in that it cannot be separated
from the individual providing it.
• Compensation: Laborers receive wages or salaries, which depend on the skill level,
demand for specific labor, and working conditions.
c. Capital
• Definition: Capital refers to man-made resources that contribute to production, such as
machinery, tools, buildings, and vehicles. Unlike land, which is provided by nature,
capital is created by humans through savings and investment.
• Types:
o Fixed Capital: Long-lasting tools and equipment, like buildings, machinery,
and computers, which are used over time in production.
o Circulating Capital: Items that are quickly used up in production, like raw
materials and fuel.
• Characteristics:
o Requires Investment: Capital is the result of current savings, as resources that
could be used for present consumption are instead invested in capital goods.
o Enhances Productivity: Capital allows labor and land to be used more
efficiently. A farmer with a tractor, for example, can work faster than one using
basic tools.
o Mobility: Some capital can be moved easily (like computers and vehicles),
while specialized equipment may be limited in use to specific industries or
locations.
• Compensation: The income from capital is known as interest, which is earned by those
who invest their resources to create capital goods.
d. Enterprise (Entrepreneurship)
• Definition: Enterprise, or entrepreneurship, is the factor responsible for organizing
land, labor, and capital in the production process. Entrepreneurs are individuals who
take on the risk and initiative to combine these resources to produce goods or services.
• Functions:
o Decision-Making: Entrepreneurs decide what to produce, how much to
produce, and where to allocate resources.
o Management: They manage resources, hire workers, and oversee production
processes.
o Risk-Taking: Entrepreneurs bear the risk of uncertainty in the market, where
the future demand for their products or services is unknown.
o Innovation: Many entrepreneurs introduce new products, processes, or
technologies to gain a competitive edge.
• Compensation: The reward for entrepreneurship is profit, which compensates
entrepreneurs for their risk-taking and organizational skills.
