Production - Principles of Business

“Production is the organized activity of transforming resources into finished products in the form of goods and services; the objective of production is to satisfy the demand for such transformed resources”

1. Primary production

This includes the extraction of raw materials from nature through fishing, hunting, gardening, mining, while tertiary production covers the provision of services that may include medical, banking, transportation, communication and teaching.

2. Secondary Production

This includes production in manufacturing industry, viz., turning out semi-finished and finished goods from raw materials and intermediate goods— conversion of flour into bread or iron ore into finished steel. They are generally described as manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also engineering and building.

3. Tertiary Production

Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of consumers. In fact, these services are supplied to the firms in all types of industry and directly to consumers. Examples cover distributive traders, banking, insurance, transport and communications. Government services, such as law, administration, education, health and defence, are also included.

FACTORS OF PRODUCTION

The four factors of production are land, labor, capital, and entrepreneurship.1 They are the inputs needed for supply. They produce all the goods and services in an economy. That's measured by gross domestic product.

Land as a Factor of Production

Land is short for all the natural resources available to create supply. It includes raw property and anything that comes from the ground. It can be a non-renewable resource. That includes commodities such as oil and gold. It can also be a renewable resource, such as timber. Once man changes it from its original condition, it becomes a capital good. For example, oil is a natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping center is a capital good.3

Labor as a Factor of Production

Labor is the work done by people. The value of the workforce depends on workers' education, skills, and motivation. It also depends on productivity. That measures how much each hour of worker time produces in output.3

The reward or income for labor is wages. 

Capital as a Factor of Production

Capital is short for capital goods.These are man-made objects like machinery, equipment, and chemicals that are used in production. That's what differentiates them from consumer goods. For example, capital goods include industrial and commercial buildings, but not private housing. A commercial aircraft is a capital good, but a private jet is not.1

The income earned by owners of capital goods is called interest.

Entrepreneurship as a Factor of Production 

Entrepreneurship is the drive to develop an idea into a business. An entrepreneur combines the other three factors of production to add to supply. The most successful are innovative risk-takers.1

The income entrepreneurs earn is profits.