Chapter 2 : Production Prepared by : Dr.Hassan Sweillam

Production Production definition : It is the process of creating goods and services. It is the transformation of inputs into outputs. Production is how much stuff an individual, business, country, even the WORLD makes. But what is “STUFF”?

PRODUCTION, cont. STUFF – Are Goods and Services. Goods – tangible (you can touch it) products we can buy. e.g. cars,T.V’s,furnitures,Mobile phone…etc Services – work that is performed for others. e.g. Education,banking,hosbitality…etc

Chain of Production Chain of Production; This shows the various production stages through which a good or services passes before reaching consumers. It is a processes that link different sectors of industries ( i.e. Primary, Secondary and tertiary)

Chain of Production, cont. 1- Primary Industries: Industries that extract raw materials from the earth such as petrol, fish, and all kinds of agricultures. 2- Secondary Industries: Industries that process primary products into manufactured goods such as car production , paper production ...etc. 3- Tertiary Industries: That provide a service e.g. Banking, insurance, education ...etc.

Inputs or Factors of Production So, what do we need to make all of this Stuff? There are four types or limited resources that used in the process of production , they are called inputs or factors of production and they are grouped into 4 categories.

4 Factors of Production 1- LAND – Natural Resources It is all kinds of available natural resources which is gift from ALLAH such as Water, natural gas, oil, trees (all the stuff we find on, in, and under the land) 2- LABOR – Physical and Intellectual All human efforts used to produce goods and services Labor is manpower , Labor includes physical and mental efforts , skilled and unskilled work.

4 Factors of Production , cont. 3- CAPITAL - Tools, Machinery, Factories It is all men made equipment and tools used in the process of production, so machines , buildings, instruments that businesses use to produce goods and services are called “Capital”. The things we use to make things Human capital is brainpower, ideas, innovation 4- ENTREPRENEURSHIP – Investment $$$ It is the human resource that organizes Labor , Land and capital. Investing time, natural resources, labor and capital are all risks associated with production

The return of Factors of Production 1- Land earn rent. 2- Labor earn Wages and fees. 3- Capital earn interest. 4- Entrepreneurship earn profit.

THREE parts to the Production Process Factors of Production – what we need to make goods and services Producer – company that makes goods and/or delivers services Consumer – people who buy goods and services (formerly known as “stuff”) Which Came First?

Production/Manufacturing Production Process Land Production/Manufacturing “Factory” Goods Labor Consumers Capital Services Entrepreneurship

Society (we) must figure out Economic Questions Society (we) must figure out WHAT to produce (make) HOW MUCH to produce (quantity) HOW to Produce it (manufacture) FOR WHOM to Produce (who gets what) WHO gets to make these decisions?

CHANGES IN PRODUCTION Specialization – dividing up production so that Goods are produced efficiently Hardee’s makes hamburgers, not shoes!! Nike makes shoes, not hamburgers

You do your job, and I will do my Job and we will be more EFFICIENT CHANGES IN PRODUCTION Division of Labor – different people perform different jobs to achieve greater efficiency (assembly line). You do your job, and I will do my Job and we will be more EFFICIENT

CHANGES IN PRODUCTION Consumption – how much we buy (Consumer mastery) The DELL store is empty because…. Everyone is at the APPLE STORE!!!

CHANGES IN PRODUCTION If we INCREASE land, labor, capital we INCREASE production Many entrepreneurs invest profit back into production If we DECREASE land, labor, capital we DECREASE production BUT WHY would we ever DECREASE production?

When Production Decreases Downsizing – laying off employees to save costs. Outsourcing – sending jobs and manufacturing overseas or contracting to outside companies to save money. Bankruptcy – government allows business to restructure it’s debt, but now all profits go to paying off debt rather than to the owners/investors. Out of Business – lose all your business, money, and profits. The current trend in the U.S. is that manufacturing jobs are declining

The Circular Flow Model

(GROSS DOMESTIC PRODUCT) PRODUCTION, cont. again A measure of the production of an entire country in one year is GDP The total money value of ALL final Goods and Services produced in a country in a year. (GROSS DOMESTIC PRODUCT)

World GDP Total GDP 2005 (millions of US dollars) 1 United States 12,455,068 2 Japan 4,505,912 3 Germany 2,781,900 4 China 2,228,862 5 United Kingdom 2,192,553 6 France 2,110,185 a 7 Italy 1,723,044 8 Spain 1,123,691 9 Canada 1,115,192 10 Brazil 794,098 11 Korea, Rep. 787,624 12 India 785,468 13 Mexico 768,438 14 Russian Federation 763,720 15 Australia 700,672 16 Netherlands 594,755 17 Switzerland 365,937 18 Belgium 364,735 19 Turkey 363,300 20 Sweden 354,115 21 Saudi Arabia 309,778

Review questions True or False Questions 1- Goods are work that is performed for others. Answer: False 2- Chain of Production It is a processes that link different sectors of industries . Answer: True

Review questions True or False Questions 3- There are three types or limited resources that used in the process of production. Answer: False 4- GROSS DOMESTIC PRODUCT is The total money value of all final Goods and Services produced in a country in a year. Answer: True

Review questions Multiple Choice Questions 1- _________ Industries that process primary products into manufactured goods. A- Primary B- Secondary C- Tertiary D- Main Answer: B

Review questions 2- ____________ are all human efforts used to produce goods and services. A- Labor B- Land C- Capital D- None of these Answer: A

Review questions 3- _______________ earn rent. A- Labor B- Land C- Capital D- Entrepreneurship Answer: B

Review questions Brief explain Questions 1- Briefly explain the Chain of Production ? 2- Briefly explain the Inputs or Factors of Production? 3- Briefly explain the Gross domestic product ? Brief explain Questions