Introduction: How does a system produce?

  Despite of the world being made out of enigmatic complexity, probability and chances randomizing it but yet maintaining balance in the society, our world still runs a basic system of reliance.  We live in a society where one is motivated by his or her needs to perform and accomplish the needs of others, thus actions are made for the system to produce.

 For instance, a business is in need of sales to generate profit thus, products are made for the ease or comforts of the customers. Vice versa, the customer is in need of comforts or ease in life therefore, buying the product of the business, generating sales.

  In business economics, this statement refers to the two factors of business- Production and Consumption. If an action were to be made, there will be a reaction. These factors correspond with one another, describing the needs of a business and the needs of the customer, in order to fulfill the cycle of the exchange between the customer and the business. 

Production

Production is the usage of resources to produce or modify products in order to satisfy the needs and wants of customers.  This process involves the addition of value to products, attracting the customers to purchase their products. Examples of production are such as the processing of wood to paper.

Classification of Production

Before producing, a business must determine on what it should produce. Once these decisions are made, the business must be aware of which category of production they fall in in order to establish relationships with other business. These few types of production are:

Primary Production

This field of production involves the extraction of raw materials which are to be sold to other businesses to manufacture their products. Examples of this are mining, logging and fishing.

Secondary Production

This production comprises of the processing of raw materials to produce semi-finished or finished products. The semi-finished products will be continued by other secondary productions in profession. Examples of this production are factories.

Tertiary Production

These businesses such as restaurants and barber shops provide services to the customer. The product of this production is the service itself.

Methods of Production

To boost efficiency, the process of the manufacturing of the product is manipulated accordingly to the situation and criterion the business has to fulfill. The ways of preparation varies to the type of products being prepared and the amount of customers. Here are a few of the well-known methods of production:

Job Production

  Alex is a car engineer who modifies cars for his customers. The cars are redesigned specially by him to suit the customer’s liking with different ranges of speed and handling. Although it might take some time, his customization are impressive therefore the customers don’t mind paying a higher price for it. He only continues to his other orders only after he finished his previous ones.

  Job production refers to the individual production of an item which must be completed before starting on another one.  These productions are usually made to be ordered and designed specifically to the customer’s liking.

Advantages

-Fulfills customer’s needs specifically

-Workers have more freedom and variations in their jobs

-Stocking of goods are not required due to individuality

Disadvantages

-Requires large amount of time

-Experience and skills are compulsory

-Expensive equipment and machinery

Batch Production

  An order of a 100 cans of grape juice is made and 50 cans of orange juice are made. The factory then manufactures the first batch of grape juice, only proceeding to the manufacturing of the next batch of orange juice. Both orders of juices are made with the same processes however differentiated by their batches and their flavor.

  Batch production refers to a group of items manufactured together by batches. Similar products may be produced in different batches undergoing the same processes. This production is usually established by businesses such as food manufacturers with similar products to be distributed or sold.

Advantages

-Gives variation to the workers due to the production of different products

-Larger range of coverage of products therefore larger range of customers

Disadvantages

-Large amount of storage needed  for raw materials and products

-More cost and time needed when changing products

Flow Production

  The coke manufacturing factory is required to produce 100,000 cans of coke per week.  The factory has to produce coke non-stop in order to achieve the goal or loss will be suffered.  Although most of the processes are fully automated, there are still needs of labor for operation control in the assembly line. The workers are allocated a specific role or task which will be repeated continuously.

  Flow production is a continuous production of a standardized item in a massive scale on an assembly line where workers and machinery have specialized tasks and roles. This production is recommended for commercialized products which has very high demands.

Advantages

-Mass production in a continuous process

-Specialization of  work

-Profit from economies of scale

-Lower cost of production due to lower requirements

Disadvantages

-Large amount of storage needed

-No variation in job

-Expensive machinery

-Very liable to demands with high risks of overstocking

 

Consumption

 When a product is finished, it is sent to the market for sales. The product is then sold and income is received. Consumption differs to the consuming of products by the people, the sole reason for production- Consumption is the demand while production is the supply. It is the estimation or data of the amount of products sold, measuring the company’s profit.

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How is consumption determined?

  The first impression of a country’s economy is by looking at the gross domestic product (GDP), the gross amount of profit made by a country in a year, in terms where consumption plays a large role. Hence, much effort is inserted by the government to estimate and improve consumption.

  From the dictionary of economics, consumption is defined as “the using up of goods and services having an exchangeable value”.  The needs of the customers vary and changes along with the products sold, thus, how do we determine consumption?

  Consumption can be determined by the durability of the product, durable products such as televisions and non-durable products such as food are separated in consumption, as they have different influences on the business.

  The categorizing of the product- the ten chapters of expenditure can be also used to determine the consumption rate accordingly to the field of needs the product fulfills. These ten chapters are:

1. Food

2. Clothing and foot wear

3. Housing

4. Heating and energy

5. Health

6. Transport

7. House furniture and appliances

8. Communication

9. Culture and schooling

10. Entertainment

 Consumption from people can be estimated by identifying the classes of the consumer and the development of the society. Different classes of consumer have different amount of income, therefore different level of consumption.

  The rich usually has higher spending levels than the poor. They tend to buy better products than the poor due to different rules of decision making. Their consumption are varies along with the society and are more vulnerable to advertisements. 




References:1. "Consumption: A Key Concept in Economics." Consumption: A Key Concept in Economics. N.p., n.d. Web. 24 Jan. 2013. <http://www.economicswebinstitute.org/glossary/cons.htm>.2. "Economics: GDP." Economics: GDP. N.p., n.d. Web. 24 Jan. 2013 <http://www.cliffsnotes.com/study_guide/GDP.topicArticleId-9789,articleId-9733.html>.3. "Product Differentiation. N.p., n.d. Web. 24 Jan. 2013 <http://www.economicswebinstitute.org/glossary/product.htm>.

The Relationship between Production and Consumption

As mentioned, production is the supply while consumption is the demand. Both are variable by changes made from each other. The demand increases inversely with the price, when the price increases, the demands decreases while the supply increase along with the price due to the amount of profit the producer makes per unit.

  Combined together in a same graph, they intersect with each other at a point called an equilibrium which is a balance between over-supplying and shortage. With over-supplying, the price must be decreased to restore equilibrium while with shortage, the price is increased.

Below is a video from YouTube which evaluates further on the demand and supply curve.

Price Elasticity

Price Elasticity

  When a price of a product is changed, depending of some factors, it will have different influences on the supply and demand.  The elasticity of a product is determined by the gradient of the supply demand graph or through the formula of:

Price Elasticity= % change in demand / % change in price

When the price elasticity is more than 1, the product is price elastic. The demand of the product increases along with the change of price. When there is a increase of price, there will be a large effect of the quality demand of the product. For instance, the fall of 15% in price increases 30% of demand. Therefore, the price elasticity is 2.

When the price elasticity is less than 1, the product is price inelastic. The demand of the product decreases along with the change of price. When an increase of price is made, the effect of quality demand is small.  For instance, the increase of 20% in price causes a 5% fall in demand. Hence, the price elasticity is 0.25 

Rare cases of price elasticity are when it equals to 0, stating that the product is perfectly inelastic. There will be no changes in demand when the price is altered.  A perfect inelastic product sounds impossible however, it can happen. Examples of such products are habit forming drugs, where they are still needed in life no matter the price.

Factors that affect price elasticity of a product are:

Competition

Price elasticity depends on the number of competitors in the field. If the price is increased, this will cause the customers to prefer the products of the same kind made by other companies with a lower price, lowering the demands of the current company.

Necessity

If the product is necessary for the customer and there are no other substitutions for the products, the customer will be forced to purchase the product no matter what the price is.

Loyalism

Loyal customers will continue purchasing the company’s product even after changes of price are made. 

Conclusion

Conclusion

  Equilibrium is everything about this world. Due to the investigations made regarding to the actions and reactions of the business and customers, it is concluded that a business survives because of its environment, and the environment advances because of the service provided by the business.

  However, instead of solely focusing on the exchange of products and income, Mother Nature must be taken of too. We rely on nature for the resources to create the products we need and desire but yet, concentrating solely on the advantages of our own, we did not consider nature to be important to us.  If no actions are taken, someday, nature might turn its effect on us, to retain the equilibrium of earth. 

Case Study: The Fall of USA

Situation

 On August 31, 2012, USA has officially entered a national debt of $16 trillion. The currency of USD had already started to deplete while the debt continues to increase.  Foreign investments had decreased since 2008 because of the fear of inflation after the country had experienced recession.

Analysis

  The reason of the United States entering debt due the foreign consumption being more than local consumption  more imports than exports happening in the country. The US has been over-dependent on the industry production of China, where most of the products are gave to China for manufacturing and producing. 

  Over the time, China has been slowly developing into a fixed economy, with communism maintaining the low exchange rate in currency while increasing the number of foreign incomes by attracting business with the low cost production.  Annually, China’s GDP increases, improving the country’s economy.

  USA however, is a country of free economy. There is no control of businesses having manufacturing partnership with other countries due to the high currency of the country.  This had wavered local businesses away from the country, increasing the import cost of the country hence decreasing the GDP. Due to the advancement of the country, US is slowly transforming into a consumer country. With the amount of expenditures used, it is out of the country’s reach to also focus on the development and the welfare of the people in the country.

  The retrieval of foreign investments had also worsened the conditions in the United States economy. Investors have doubts in the unstable economy infrastructure of the country, transferring their investments to more stable countries.

 

  The sudden loss of money had increased the debt of the country due to the unchanging habits of consumption of the people and businesses. Although it is impossible for the country to go bankrupt as they are allowed to print any amount of money they want, but if this continues on, US will be forced to print more money causing seignoirage, the loss of value of a country’s currency, until it becomes valueless. 

Activities

Here are a list of activities to challenge yourselves on the understanding of the topic Production and Consumption. Have Fun!

http://www.tutor2u.net/business/worksheets/Production-Methods-Intro.pdf
http://www.tutor2u.net/blog/files/Market_Demand_Supply.pdf