PRODUCTION THEORY NOTES

This industry specialises in production of liquid products. This therefore tells us that there was need or a gap in the market for the above products. As a result therefore, the founders of the industry met and agreed on starting up this industry to supply or provide the required products.

 

Facts

Production is the process through which resources are converted into intermediate or final goods. Intermediate goods are goods, which can be used to produce other goods and services. Final goods are goods ready for consumption.  The main purpose of production is to satisfy the needs and wants of an individual. This is done through provision of goods and services.

Purpose of production

The purpose of production is consumption. With a market system firms specialise in producing particular types of capital goods and consumer good. Their direct motivation for producing these goods is to sell them for a profit.

11.2: LEVELS OF PRODUCTION

Activity 11.3

With the guidance of your teacher, visit a factory near your school and observe the stages that the product undergoes till its completion. Write down your findings.

Discovery
From your observation from the field study, in groups of five, identify and explain the levels of production. Make presentations in the class.

Every product we see in the market undergoes several processes. In a sugar factory for instance, there is need for the raw material (sugarcane) to be harvested first, and then transported to the factory, before commencing the production process. The same process applies to all other products.

Facts

In all these products, production takes the following three main levels:

11.2.1  Primary level of production

This is the first stage or level of production. It is also called the extractive stage because it involves extraction of raw materials. All activities at this level are concerned with the provision of raw materials. This level involves extraction of raw materials from land or their natural location and form. Goods produced at this level are called primary goods. Activities such as farming, mining, fishing, quarry working and lumbering fall in this category. This level entails use of both human and capital labour and capital to produce the primary goods and services.

 

Secondary level of production

This is the second stage or level of production. It involves the use of primary goods (or raw materials) obtained from primary production to make other goods. The primary goods or raw materials are transformed or converted into finished or semi finished goods. The process of converting raw materials into other goods is called manufacturing. Thus secondary industries are also known as manufacturing industries or processing industries. Goods produced at this level are called manufactured or processed goods.

Examples include:

  • Conversion of cotton or wool into cloth.
  • Conversion of sugarcane into sugar.
  • Conversion of trees (wood) into paper.
  • Refining petroleum or crude oil into petrol, paraffin and diesel.
  • Processing milk to obtain butter, ghee and yoghurt.
  • Processing fruits to obtain fruit juices and canned fruits.

 

Tertiary level of production

This is the third and final stage or level of production. The main focus at this level is the production and provision of services. These services can be categorised into commercial and direct services.

Commercial services are activities related to trade and the services that support trade. Trade involves distribution and sale of goods. Examples of commercial services that support trade include banking, transport, insurance, mail services and communication

 

  • Direct services are services provided or offered by professionals. Examples include medical services, teaching, legal services, entertainment, security services and hair dressing.

 

 

Facts

There are two main types of production. These are:

  1. Direct production.
  2. Indirect production.

11.3.1 Direct production

This is the production of goods and services for one’s own consumption. It is also known as subsistence production.  It entails production wholly or mainly for home consumption. However, if there is an extra production, the farmer or producer can sell in the market. In the above case study for instance, the first farmer was practising this type of production.

11.3.1.1 Characteristics of direct production

  1. All activities in production are carried out by oneself or with the help of family members, friends or relatives.
  2. Quality of goods produced may be poor if the person is unskilled.
  3. Since the goods are produced when needed, the skills used may not be improved.
  4. Tools used are simple.
  5. Rate of production is low, since there is no competition.
  6. The quality of goods produced may be poor, leading to poor standards of living.
  7. Trade is not encouraged since production is for home consumption.

11.3.2.1 Indirect production

This is the production of goods and services mainly for sale in the market. It is also known as commercial production. In the above case study, the second farmer was practising indirect production. This is because all her output (milk) was being sold to the market.

Characteristics of indirect production

  1. It encourages specialisation.
  2. It aims at producing in plenty (surplus).
  3. It entails production for sale in the market or to customers.
  4. It enhances skill development as a person gains more knowledge when doing the same activity over and over again.
  5. The rate and speed of production is faster than in direct production.
  6. It creates employment opportunities.
  7. Production is normally on large scale.

11.4 FACTORS OF PRODUCTION

Activity 11.5

Case study

In a school, there are several commodities that ought to be supplied.

Assume as students, you would like to start supplying school uniforms.

  • What are some of the things you will consider before starting the business of supplying uniforms?
  • Do you think the business can grow? Explain your answer.
  • Identify the requirements that you will need to have before starting the business.

Discovery

In the above case study, we can say that a school has students of various sizes and categories. We have short, medium and tall students. The students can also be male students or female students. Similarly, we have slim and fat students. From these comparisons, we can then move on prepare the uniforms basing on each student, if given an order. We can start off by measuring the sizes of every student, so as to avoid oversize or undersize clothes.

The business can grow only if some of the necessities are provided. Some of these include availability of capital, labour and a place to be carrying out the functions.

Facts

Factors of production refer to all productive inputs used in the production of goods and services and the major ones are capital, labour, land and entrepreneurship.

The following are the main factors of production.

  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurship

11.4.1: Land as a factor of production

Facts

Land refers to all the free gifts of nature, which are found on earth, beneath or above. It includes soil, forests, mountains, oceans, rivers, minerals and air. The reward to land for its contribution in the production process is rent or rates.

11.4.1.1 Characteristics of land

  1. Land has fixed supply: The size of land does not undergo any change. Land cannot be increased nor decreased.
  2. Land is a free gift of nature: Land existed long before human beings came in existence. Land is not as a result of human effort.
  3. Land is permanent: Unlike other factors of production, which are perishable, land cannot be destroyed. It is non-perishable.
  4. Land is a primary factor of production: Any production process starts with land.
  5. Land is immobile: Land is geographically and occupationally immobile. Land cannot move from one place to another.
  6. Land has inelastic supply: The supply of land cannot be adjusted according to its demand.
  7. Land is differentiated: Land differs in productivity. Some pieces of land are more productive than others. As a result, lands different prices.

Remember!! Land as a natural resource is a primary factor that is necessary for production to take place. That is why it should be conserved and protected using all possible measures such as mulching, afforestation and reforestation and intercropping, to avoid soil erosion, deforestation and land depletion.

The reward for land is rent and depending rates.

Types of rent include:

  • Quasi rent: This is the payment to a factor of production that has inelastic supply in the short run and elastic supply in the long run.
  • Commercial rent: This refers to the payment for hiring and the use of durable assets like a house.
  • Scarcity rent: This refers to the payment to land due to an increase in its demand.
  • Site rent: This refers to the payment to a factor of production according to its location.
  • Economic rent: This is payment to a factor of production that is over and above its supply price (transfer earning).
  • Transfer earnings: This is the minimum payment to a factor of production necessary to maintain its present form of employment.

11.4.1.2 Determinants of rent

  • Size of rental property: The size of the rental property determines the rent to be paid. If the rental property is big then rent will be high and if it is small then rent will be low.
  • Location: Rental properties that are located in areas that strategically located in areas that have access to roads, communication network and other social economic infrastructures, will attract high rent than those located in remote areas that have no access to such infrastructures.
  • Amenities: properties that have more facilities will attract high rent than those that have less facilities
  • Demand and supply: When the demand for rental property is high, rent will also be high but if demand is low as compared to supply, rent will be low.
  • Ability: The ability of the customers will also determine the rent to be charged. When their ability to pay is high, high interest will be charged but if their ability is low, low rent will be charged.
  • Competitors: The degree of competition influences the rent to be charged. If competition is high, rent will be low but if competition is low, rent will be high.
  • Prevailing market conditions: The existing economic conditions such as level of inflation, government policies, taxes and subsidies among others determine the rent to be charged. If these conditions are favourable, rent will be low and if they are unfavourable rent will be high.

Example:

Given that the transfer earning of a factor of production is 500,000 FRW and the economic rent is as twice as its transfer earning, calculate the factor’s actual earning.

Actual earning = Economic rent + transfer payment
  = 2(500,000) + 500,000
  = 1,000,000 + 500,000= 1,500,000 FRW

11.4.2: Capital as a factor of production

Activity 11.7

One of the inputs required in the production process is money and nonmoney resources like equipment, buildings, furniture, machines, motor vehicles and human resources. All these constitute capital.

In groups of five, identify the types of capital (basing on the above examples). Discuss the role capital plays in the production process. Make presentations to the class.

Facts

Capital refers to all manmade resources used in the production process of goods and services. Capital can be categorised as follows:

  • Fixed capital
  • Liquid capital
  • Human capital

(a) Fixed capital

This refers to the stock of all real assets in a business. This capital is fixed in nature. It contributes to the production of goods and provision of services indirectly. Fixed capital is the capital used by the company for a longer period of time. It is not intended for resale. Examples of fixed include buildings, equipment, vehicles, furniture and fittings. Fixed capital is also called fixed assets.

(b) Liquid capital

This refers to the capital of a business, which is in monetary form or near liquid assets, like government securities. Liquid capital can easily be turned into cash.

(c) Human capital

This is the productive qualities found in human beings that are used in the production of goods and services. These productive qualities are acquired through education and training. Human capital therefore constitutes the skills acquired through education and training by human beings, which they use in the production of goods and services.

The reward for capital is interest, whose rate depends on the demand and supply of capital.

Remember !!! In order to get capital to start a business, it is important to think about saving part of our earnings and making proper use of our financial resources.

11.4.2.1 Determinants of interest

  • Inflation: When there is inflation in the country interest rate will be high but when there is a deflation interest rate will be low.
  • The degree of risk: When the degree of risk is high Interest will also be high but if the degree of risk is low interest will also be low.
  • Government monetary policy: If the monetary policy is restrictive interest rates will be high in order to discourage money in circulation but if it is expansionary monetary policy interest rate will be low.
  • Demand of credit: When the demand for credit is high interest rate will also be high and the demand for credit is low interest rate will also be low. In addition an increase in supply of credit reduces interest rate while a decrease in supply of credit increases interest rate.
  • Duration of the credit: Long term loans attract high interest while short term loans attract low interest.
  • The amount of credit (loan): Big loans are charged high interest rate while small loans are charged lower interest.

11.4.2.2 The role of capital in production

Capital as a factor of production plays a major role in the production process and therefore in the development process. The following are some of the roles:

  1. Promotion of technological progress

Capital enables transition from primitive to modern methods of production. This is enhanced through importation of modern technology and equipment, hiring technical experts and labour, and purchase of inputs and machinery.

  1. Facilitates economic growth

The presence of capital in an economy increases the rate of economic growth. This is because capital increases the rate of resource exploitation, thereby promoting simultaneous investment in all sectors.

  1. Promotes factor mobility

Capital increases occupational and geographical mobility of other factors of production. This results into efficient distribution of resources and an increase in the quantity of resources available.

  1. Facilitates industrialisation

Physical capital in form of industrial equipment facilitates quick industrialisation of the economy. Industrialisation is the creation of industries in an area.

  1. Facilitates employment creation

Capital leads to increased productivity and investment. This creates more employment opportunities.

  1. Promotes research and innovation

Capital makes it possible for an organisation to undertake research. The research aims at improving its operations. This therefore enables organisations to become innovative and more competitive in the market.

  1. Promotes specialisation in the production process

Capital enables labour to specialise in operating different tasks. These tasks done by the workers, in turn lead to the acquisition of more skills by the workers (labour). Workers therefore, improve their ability to handle different types of machinery. This leads to increased labour efficiency and production of more goods and services.

  1. Produces quality goods and services

Capital facilitates production of high quality goods and services. The use of capital equipment such as computers leads to improvement in the quality of goods and services produced.

  1. Facilitates resource renewal

The presence of capital enables a producer to renew his or her resources, to avoid resource exhaustion and also maintain high levels of output.

  1. Reduces dependence

Availability of capital enables a country to create capacity to produce all its requirements and hence reduced dependence.

11.4.2.3 Capital accumulation

Activity 11.8

In groups of five, visit the library or the internet and carry out research on capital accumulation. From your findings, explain the meaning of capital accumulation and the factors that influence the level of capital accumulation in an economy.

Facts

Capital accumulation refers to the process of increasing a country’s stock of capital assets over a given period of time. Capital accumulation can either be gross capital accumulation or net capital accumulation (net investment). Gross capital accumulation refers to the total profits on capital assets. This includes replacement of worn out capital assets plus purchase of new capital assets that a  company uses to increase its capital base. Net capital accumulation (net investment) refers to the addition to the existing volume of capital or expenditure on new assets only.

11.4.2.4 Determinants of capital accumulation

  1. The level of income in an economy

When income increases and other factors remain constant, the level of investment also increases. Hence there is more capital accumulation. Low level of income however discourages savings and investment. This in turn leads to low levels of capital accumulation.

  1. Political climate in the country

The maintenance of law and order, and security of life and property promotes stable business and investment conditions in an economy leading to higher capital accumulation.

  1. Government policies on saving and investment

When government policy favours saving and investment, capital accumulation increases. On the other hand, if government policy does not favour investment, the level of capital accumulation becomes low.

  1. Rate of capital inflows and outflows

High levels of capital inflows lead to an increase in capital accumulation. This occurs especially when this capital is invested in development projects. High level of capital outflow however reduces the amount of capital that would be invested to increase on capital stock, hence reduced capital accumulation.

  1. The level of development of financial institutions

When a country has well developed financial and economic institutions, it becomes easy to mobilise resources. This can be done in form of savings, which in the end can be turned into investments. Hence this increases the level of capital accumulation. On the other hand, if financial institutions are less developed, the level of savings will be low.

As a result, capital accumulation will be low.

  1. Population structure in terms of growth rate and age

A high population growth rate and a population with very many dependants discourage savings and investment. This is due to high marginal propensity to consume. This leads to reduced capital formation. A low population growth rate with many people in the working class encourages savings, investment, more output hence increased capital formation.

Advise this man having many wives.

 

 

Comprehensive sexuality education should be thoroughly taught to all people. An educated society is a healthy and wealthy society. Reproductive health education should also be taught to all families so as to control the population.

  1. The size of the market

The existence of well organised and expanding markets encourage production of goods and services and generates more incomes. This leads to more savings for re-investment, leading to increased capital accumulation. When the size of the market is small, production will be low, leading to low incomes, low savings, low investment and less capital accumulation.

  1. The level of entrepreneurship

When there are many people in the economy with good entrepreneurship skills and ready to begin new enterprises, the level of investment and capital formation will be high. In case entrepreneurship skills are inadequate, the level of investment will be low hence low level of capital formation.

11.4.3: Labour as a factor of production

Activity 11.9

Taking an example of your school, identify the work done by the different workers ranging from administration, teachers and casual workers. Basing on your observation, what can you say is the meaning of labour? In addition, identify also the characteristics and the role labour plays in the production process. Read out your findings in class.

Discovery

On a daily basis, people move up and down doing ‘something’. At times they are busy to an extent that they are not available in their offices. This is because they are working.

People have different types of work. There are those who teach, cook, guard us, drive and clean our environment. From their distinct duties, we have teachers, security guards, chief chefs, garden keepers, nurses, drivers and administrators. Some of this people use more energy than others. Similarly, some of them work as they move from place to place while others are within.

Facts

Labour refers to any physical or mental effort directed towards production of a good or a service. Labour can either be skilled, semi- skilled or unskilled.

(a) Skilled labour

Skilled labour refers to labour that is well trained. The skilled workers have trained and achieved the relevant knowledge and skills in their specific fields. In most cases, they are called experts. Those who have worked in the field for some time have gained even more experience.  Skilled labour is the most desired labour in the economy. This is because it has practical knowledge and its productivity is high. Some examples of skilled labour include teachers, doctors, lawyers, engineers and veterinary officers.

Remember!!! We should educate our children to enable them be experts in their fields they would like to be in future. Give equal education to both the boy and girl child.

Remember

The Rwandan economy will be more productive when all women and men are full participants. When the needs of all groups with special needs are addressed, mainstream gender and family in planning, budgeting and in all development programmes/projects at national and local levels. Reduce poverty levels among men and women and reduce gender-based violence, malnutrition and other related conflicts at both family and community level.

EDPRS2 Ministry of Finance and Economic Planning (MINECOFIN), May 2013

Comprehensive sexuality education… Reproductive health education.

Remember

“…contribute to the national efforts to halt the spread of HIV and AIDS by 2015 through education of individuals and families about HIV/AIDS, providing motivation for counselling, distribution of condoms, and making sure that all patients with HIV/AIDS or Tuberculosis receive and adhere to treatment and support. Key intervention include regular sensitisation regarding HIV, voluntary counselling and testing, prevention of mother to child transmission, condom distribution etc” EDPRS2 Ministry

(b) Semi skilled labour

Semi-skilled labour is labour that has some little education and little working experience. In most cases, semi skilled labour has the practical and vocational skills. Their productivity is higher than that of unskilled labour. Most of them gain the knowledge and skills as they perform their duties, under the guidance of their supervisors. Some of these semi skilled labourers are carpenters, mechanics, plumbers and artisans.

 

 

Unskilled labour

Unskilled labour is labour in its raw form. It is labour that is not educated. It is labour that has no practical experience in any particular job. Work done by unskilled labour need no specific skills or training. However, if guided, output can be great. Most of the unskilled labour perfom the caual jobs such as cleaning the compound, washing a car, looking after cattle, weeding in a farm and fetching water. At times training such people is necessary to increase output.

Recall

  1. Why should unskilled labour be trained?
  2. Identify the equipment or machines that unskilled labour ought to have some knowledge before operating.

The reward for labour is wages or salaries.

11.4.3.1 Determinants of wages

  • Price level: When the price for a firm’s products is high, more revenue will be realised by the firm and therefore high wages are paid other factors remaining constant.
  • Cost of living: When the cost of living is high, high wages are paid and if the cost of living is low, wages will be low as other factors remaining constant.
  • Demand and supply of labour: When the demand for a particular type of labour is high compared to its supply, wages paid to that labour will be high but if the supply is high compared to its demand, wages will be low.
  • Government legislation: Government policies on wages will influence the wages to be paid. If government legislation favours high wages then the wage rates will be high than when the legislation favours low wages.
  • Employer’s ability to pay: If the employer has the ability to pay high wages then wages will be high. But if the employer’s ability to pay is low then wages will be low other factors remaining constant
  • Profits earned by the company: If a company earns high profits then wages paid to its workers will be high than when the company earns low profits.
  • Trade unions: Trade unions may influence the level of wages to be paid to their members. If the trade unions are strong, they may successfully advocate for higher wages to their member but if they are weak with low bargaining power then wages will be low.
  • Education and experience: High wages are paid to the highly educated and experienced workers while low wages are paid to less educated and inexperienced workers.
  • Productivity of labour: High wages are paid to more productive workers but low wages are paid to less productive workers.

11.4.3.2 Characteristics of labour

Labour has the following characteristics, which distinguish it from other factors of production:

  1. Labour is perishable. It cannot be stored, postponed or accumulated for the next period or for future.
  2. Labour cannot be separated from the owner or labourer. Labour and the provider are the same.
  3. Labour has weak bargaining power. As a result, its payment is usually low compared to other factors of production. Since labour cannot be stored, it is less organised and lacks reserve funds to support it when there is no work.
  4. Labour is human. Every labourer has his or her own tastes, habits and feelings which must be put into consideration by the employer.
  5. Labour supply is regressive. An increase in wages may reduce the supply of labour. This is because achievement of targets may reduce and more time set aside for leisure.
  6. Labour is both the beginning and the end of production. Production can only start if labour is applied to land and capital while the end of production is consumption of final goods and services, which is done by labour.
  7. Labour is heterogeneous. There are differences in labour efficiency. Some labourers are more efficient than others. This can be due to differences in skills, experience gained, natural ability and level of training.
  8. Labour is geographically and occupationally mobile. Labour can easily be transferred from one occupation to another or from one geographical location or area to another.

11.4.3.3 Labour mobility

Labour mobility is the ease with which labour can move from one occupation to another or from one geographical area to another. The movement of labour from one occupation to another is known as occupational mobility of labour. The movement of labour between geographical areas is known as geographical mobility of labour.

It should be noted that labour can move within the same occupation either vertically or horizontally, or in different occupations.

Vertical mobility of labour is the movement of a worker from one position (or job group) to another, but within the same occupation. This involves change of status. It may be a promotion or a demotion. For example, a teacher may be promoted from being a classroom teacher to a Senior Teacher, a deputy or a head teacher.

Horizontal mobility is the movement of labour from one job to another at the same level in a given industry. A secretary for instance, can be moved from finance department to the human resource department, within the same firm or industry.

11.4.3.4 Labour efficiency

Labour efficiency is the ability of labour to produce the greatest quality and quantity of output within the shortest time possible. It is the productivity of a unit of labour per unit of time.

11.4.3.5 Division of labour and specialisation

Activity 11.10

In primary school, a teacher can teach different subjects in different classes. A teacher can also teach all subjects in one class in primary level.  In secondary schools, a teacher is allowed to teach a maximum of two subjects in all classes.

  • Apart from the school setting, identify other places, firms or industries where workers either work specifically on a certain job, or work on several jobs.
  • In your opinion, would you like to work on a specific duty or across in a given firm? Explain your answer.
  • Discuss the advantages and disadvantages of working on a given duty all the time and working across on a given job. Make presentations to class.

Discovery

It is true teachers in primary schools teach more subjects than teachers in secondary schools. In the transport industry, a driver strictly is assigned to his or her task of driving, while a conductor can collect the fare, open the door for passengers, alight to look for change outside and issue change to passengers. A daytime guard can also apart from opening the gate for visitors, he or she can direct visitors to where they are supposed to go, acknowledge reception of some documents and keep watch of the building or compound, as directed.

We can therefore say that a labourer can work on several duties well, depending on the type of work being done, the expected quality and quantity, and the time frame. There are however, some duties, which need an individual (labourer) to master the skill and keep on working on the same skill so as to improve on it. A driver for instance has to master driving the vehicle, parking, reversing, starting and stopping the car. Repetition of such driving skills will enable the driver master the driving skills. With time, the driver will be in position to drive with ease.

Facts

Specialisation refers to an economic situation where a labourer concentrates in the production of one or very few commodities in a more effective and efficient way.  In this case, resources are concentrated in production of relatively few commodities. Labour specialisation refers to the allocation of tasks among workers so that each worker concentrates on the task he or she is most effective and efficient.

11.4.3.6 Adam Smith’s Law of specialisation

Adam Smith’s law of specialisation suggests that the bigger the market the higher the level of specialisation. It also states that specialisation leads to the greatest improvement in the productive powers of labour and its productivity since each worker gains expertise by repeating the same task and that saves time.

11.4.3.7 Division of labour

Division of labour is a situation where the production process is divided into a series of repetitive tasks. Each worker is responsible for a particular task where he or she can perform better.

11.4.3.8 Forms of specialisation

  1. Specialisation by craft: This is a form of specialisation where particular groups of people concentrate on particular crafts or activities. These particular groups of people include farmers, carpenters, ironsmiths and tailors.
  2. Specialisation by process: This is a form of specialisation where different people specialise at different stages in producing a particular commodity in the production process. In a printing industry for example, we have people who have specialised in typing, others in binding, others in printing and photocopying, others in repairing machine and others in packaging.

 

Regional specialisation: This is where different regions specialise in what they can produce most efficiently and exchange it with other regions.

International specialisation: This where different countries specialise in the production of different commodities where they incur the least opportunity cost which enables them to participate in international trade.

Advantages of specialisation and division labour

  • It increases efficiency and the ability of labour. This is because there is repetition of a task, which results into efficiency at operation of that single task. Remember, practice makes perfect.
  • It saves time. Time that would have been wasted in moving from one job to another is converted into another productive activity. The time can also be used in perfecting the quality of the product being produced, since with specialisation one concentrates on a particular job or task.
  • It increases production. When a worker concentrates on production of a given product, his or her productivity increases. This increases output, thereby reducing costs of production. As a result, the price of the good in the market may reduce, enabling many to access the product. This in

turn improves the standard of living.

  • Specialisation leads to creation of more employment opportunities. Many occupations and tasks are created for the different diverse skills.
  • Specialisation leads to production of better quality goods and services. Workers become perfect in performance of their tasks.
  • International specialisation results into development of international trade. This is because countries produce commodities where they have a comparative advantage and import other commodities, which other countries can produce with a better comparative advantage.
  • Specialisation promotes commercial production. Workers produce commodities for exchange. This further leads to growth of the economy.
  • It minimises costs and time of training of workers. Workers can easily be trained operation of a single task.
  • It increases occupational mobility of labour. Workers become more professional in their tasks, which increase their mobility.
  • It makes the use of machines and other tools possible. When a job is divided into a series of occupations, the use of machines becomes possible since most machines are specialised in nature.

Disadvantages of specialisation and division of labour

  1. It leads to monotony and boredom. Performing the same task all the time makes the work monotonous and boring. This reduces pleasure on the job, leads to job dissatisfaction, reduces efficiency and affects production.
  2. Division of labour increases industrial interdependence. This results into delays in production, inefficiency and losses in case of a breakdown in the process of production.
  3. Over specialisation increases the risk of unemployment in case a specialised worker is laid off. This is because the worker only knows a small part of how to produce goods but not the whole process.
  4. There is loss of creativity and responsibility. This is because many workers join hands to produce a commodity. If production is not up to the required quality, none of the workers is held responsible since everybody’s responsibility is nobody’s responsibility.
  5. It can result into the rise of monopoly. When a worker specialises in performance of a given task, he or she may become a monopolist in that field and may end up cheating customers.
  6. It reduces mobility of labour. This is because a worker is trained to handle only part of the whole task. This makes it hard for the worker to find a similar job in another place.
  7. Specialisation leads to loss of craftsmanship. This is because it results into increased use of machines. As a result, labour becomes machine attendant hence low skill utilisation.
  8. There is a possibility of overproduction. Due to specialisation, there is large scale production which creates excess supply. This leads to losses to the producers.

11.4.4: Entrepreneurship as a factor of production

Activity 11.11

In groups of five, identify people who have successfully started businesses and are still running the businesses.

  • List down the types of businesses they run.
  • How do they manage to run the busineses?
  • Identify the characteristics that they have that enable them manage their businesses.
  • Discuss too the factors that affect their businesses.

Facts

An entrepreneur is a person who organises and co-ordinates other factors of production to produce goods and services. An entrepreneur hires labour and land and looks for capital. The entrepreneur then combines these factors in appropriate proportions to produce goods and services. The entrepreneur is rewarded profit for his contribution in the production process.

11.4.4.1 Determinants of profit

  • Nature of competition: The nature of competition will determine profit to be earned by a firm either in the long run or short run. If it is perfect competition abnormal profits will realised in the short run but in the long run normal profits will be realised. If it is monopoly it earns abnormal profits in the short run and the long run.
  • Price level: When the price for a firm’s products is high, the firm will earn high profits but if the price is low, profits will be low.
  • Cost of production: If a firm’s cost of production is high, its profits will be low but the cost of production is low profits will be high.
  • Size of the market: When the size of the market for a firm’s products is big, its sales will be high and there its profits will also be high. But if the size of the market is low, its sales will be low and profits will also be low
  • The level of taxes: High taxes on profit reduce the firm’s profits while lower taxes on profit increase the firm’s profit.
  • Production efficiency: When a firm uses production techniques that are efficient, its cost will reduce thereby increasing its profits. But if its production techniques are inefficient, its cost will increase thereby reducing its profit.

11.4.4.2 Characteristics of entrepreneurs

An entrepreneur has the following characteristics:

  • Initiative: Does things before asked for or forced to by events. An entrepreneur acts faster to expand the business to new areas, products or services.
  • Perceives opportunities: Identifies business opportunities and mobilises necessary resources to invest in the identified opportunities.
  • Persistence: Takes repeated or different actions to overcome obstacles. An entrepreneur always gives another chance for the business before making a conclusion.
  • Gathers information: Consults experts for business and technical advice. An entrepreneur seeks information on client’s or supplier’s needs. An entrepreneur personally undertakes market research and makes use of personal contacts or information networks to obtain useful information.
  • Problem solving: Conceives new ideas and finds innovative solutions. An entrepreneurship is always ready and willing to look for a solution to the existing problems affecting the business.
  • Self-confident: Makes decisions on his own and sticks to them inspite of challenges or initial setbacks.
  • Self-critical: Aware of personal limitations but tries to improve upon by learning from past mistakes or experiences of others. An entrepreneur is never complacent with success.
  • Persuasive: Persuades customers and financiers to be part of his or her business.
  • Assertive: Committed to outcome. An entrepreeneur instructs, reprimands and disciplines self for failing to perform.
  • Risk taker: Takes risks without fear after calculating the estimated impact on business. An entrepreneur has the ability to take risks in business and finds out ways and techniques of reducing or minimising them for their benefit.

11.4.4.3 Functions of an entrepreneur

  1. Organises other factors of production.
  2. Undertakes risks and bears the burden of uncertainties of the business.
  3. Co-ordinates other factors of production. An entrepreneur sets goals and co-ordinates other factors of production to produce goods and services.
  4. Is a decision maker. The entrepreneur undertakes all the decisions of the business.
  5. Directs the development of the enterprise. An entrepreneur develops concrete plans for the development of the enterprise.
  6. Is an initiator. The start of any business enterprise is as the result of the initiative of the entrepreneur.
  7. Is an innovator. An entrepreneur introduces new methods of production to improve the quality and quantity of output.

11.4.4.4 Barriers to entrepreneurship development

Barriers are the factors that hinder or limit the development of entrepreneurship. Barriers can prevent an entrepreneur from accessing customers or sources of getting more capital for the business. Barriers also hinder entrepreneurs from exploiting their potential. Some of these barriers include the following:

(a)  Poor entrepreneurship skills

Most entrepreneurs and potential entrepreneurs have little or no entrepreneurship skills. They lack creativity, innovativeness, endurance, flexibility and other entrepreneurship characteristics.

(b)  Lack of business and technical skills

Marketing, accounting and management skills are some of the skills required by all practicing entrepreneurs to effectively manage their ventures. Many ventures also require specialised technical know how to set up, operate and manage. Lack of these skills and high rates of illiteracy at times limits the capacity of entrepreneurs to effectively exploit the full potential of their ventures.

(c)  Lack of mobility and exposure

Exposure of entrepreneurs normally offers them biggest revelation for new ideas that shape their creativity and innovativeness as entrepreneurs. However, many of them do not travel, research nor explore widely. This limits the creativeness and innovativeness of potential and practicing entrepreneurs.

(d)  Lack of business ethics

Many entrepreneurs have failed to run and sustain their businesses because of unethical behaviour. In most cases, there are problems of unpaid loans, debts and accumulated expenses. At times, entrepreneurs evade paying tax and registering their businesses legally, while others engage in corruption, smuggling and drug trafficking. Such tendencies are illegal and should be stopped immediately.

(e)  Career dependency

Most people in our country especially the learned, depend wholly on their careers for their livelihoods. Entrepreneurship has long been regarded as a last resort, considered only after failure to secure a whitecollar job. Entrepreneurship is regarded as a job for the less educated. Although this attitude is rapidly changing, its effects remain a big barrier to entrepreneurship in Rwanda.

(f)  Lack of role models in entrepreneurship

Rwanda has few role models in the field of entrepreneurship. This limits the number of people who willingly aspire for careers in entrepreneurship. The available few cannot fully meet the demands of the many upcoming entrepreneurs.

(g)  Inadequate finance

Banks and micro finance institutions charge high interests on their loans. As a result, entrepreneurs fear seeking for loans to advance in their businesses. In additions the conditions set for one to access a loan may not favour upcoming entrepreneurs. The terms of credit are unreasonable, requiring difficult collateral securities to secure loans and charge high interest rates.

(h)  Low purchasing power

Low incomes and high rates of unemployment limit the purchasing power of the population. This makes it hard for businesses in general and entrepreneurs in particular to acquire the necessary economies of scale.

Unit Summary

In this unit the following were discussed:

  • Production, which was defined as the process of transforming raw materials into finished products that can satisfy human needs.
  • Types of production; such as direct production and indirect production. Direct production is the production of goods and services for one’s own consumption. Indirect production is the production of goods and services mainly for sale to the market.
  • Levels or stages of production; such as primary level of production, secondary level of production and tertiary level of production.
  • Factors of production; such as land, labour, capital and entrepreneurship.
  • Specialisation and division of labour were also discussed. Division of labour is the allocation of tasks among workers so that each worker concentrates on the task where he or she is most efficient. Specialisation is a situation where resources are concentrated in production of relatively few commodities in which one is most efficient.
  • Advantages of division of labour and specialisation were also discussed. These include increased efficiency and ability of labour, higher production, time saving, minimising costs and time of training, improvement of workers’ skills, production of better quality products, increased use of machines and increased mobility of labour.
  • Disadvantages of division of labour and specialisation were also discussed. Thee include; monotony and boredom, loss of craftsmanship, low mobility of labour, creation of unemployment, overdependence, low skill development and danger of overproduction.
  • The role of capital in production; for instance, promoting technological progress, promoting factor mobility, facilitating economic growth, facilitating industrialisation, promoting employment and facilitating resource renewal.
  • Capital accumulation was defined as the process of increasing a country’s stock of real assets.
  • Determinants of capital accumulation; such as level of income, level of savings, interest rates, the level of taxation, government policy, political stability, level of investment and profit levels.

Remember !!! For a country to attain high levels of output from production, the government and other stakeholders  should provide an equal opportunity to all citizens (men and women) to participate in the production process.

Placing the family at the centre of development, the care and protection of children and gender equality are pre-requisite to achieving equitable and sustainable development for girls and boys, women and men.

Unit Assessment 11

  • (a) Define the term production.
    • Explain the advantages of division of labour in the production
  • (a) What are the functions of an entrepreneur as a factor of               production?
    • What are the barriers to entrepreneurship development in

Rwanda?

  • (a) State the factors of production and indicate their rewards in the     production process.
    • Explain the factors that influence the level of capital          accumulation in an economy.
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