Production - Business Studies Form 1 Notes

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  • Production refers to the creation of goods and services in order to satisfy human wants.
  • It may refer to the increasing the usefulness of goods and services.
  • Production involves the activities that enables one to provide goods and services.
  • Such activities may include:
    • The transformation of raw materials into finished goods
    • Transportation
    • Storage
  • The goods and services created through production must have usefulness (utility) to the consumer

Types of Utility

  • Utility refers to the ability of a good or service to satisfy human wants.
  • There are for types of utility;
    • Form utility
    • Place utility
    • Time utility
    • Possessive utility

Form Utility

  • Refers to changing of the form of a commodity e.g. converting raw materials into finished goods. A good example of form utility is the conversion of sugarcane into sugar through processing

Place Utility

  • Refers to changing of the location of a commodity in order to bridge the geographical gap between the producer and the consumer.
  • Place utility is facilitated by transportation. E.g. transporting bread to school.

Time Utility

  • Refers to making commodities available to consumers at the right time. It created when a good is stored until it is ready for use.
  • Time utility is facilitated by storage. E.g. food in the school store during the holiday to be used when the school re-opens

Possessive Utility

  • Refers to the transfer of ownership of commodities from one person to another.
  • Possessive utility is mostly facilitated through trade. E.g. transferring ownership of bread the shopkeeper to the student.
  • For ownership of goods and services to be transferred, a price must be paid.

Types of Production

 Production can be classified into two;

  • Direct production
  • Indirect production

Direct production

  • Refers to the production of goods and services for one’s own consumption.
  • It is also known as subsistence production.
    Examples of direct production may include cases where one grows food products for his/her own use or where one makes clothes for his/her own use

Characteristics of Direct Production

  1. Goods produced are of low quality
  2. Encourages individualism
  3. Leads to low standard of living
  4. Can be very tiring
  5. It does not encourage invention and innovation
  6. A lot of time is wasted as one moves from one job to another
  7. Cheap tools are used in production
  8. It is mostly done on small scale
  9. Goods and services are produced for one’s own use
  10. The rate of production is low

Advantages of Direct Production

  1. Requires less finances
  2. Required goods can be produced directly
  3. Specialisation is not necessary hence the producer can engage in several other activities

Disadvantages of Direct Production

  1. It cannot satisfy all the needs of the producer
  2. Poor quality goods are produced
  3. Improvement of the quality of goods may not be possible
  4. It discourages creativity and innovation
  5. Variety of goods cannot be produced
  6. Results in poor living standards
  7. The rate of production is quite low

Reasons for the Popularity of Direct Production

  1. Most producers rely on poor technology
  2. Most producers have low incomes
  3. Negative attitude towards commercialization of production activities
  4. Poor resource endowment
  5. Lack of international trade
  6. Lack of market for goods and services produced
  7. Lack of skills to produce in large scale

Indirect Production

  • Refers to the production of goods and services with the aim of selling the excess to acquire what one does not have.
  • Indirect production is geared towards satisfying the wants of an individual and those of others.

Characteristics of Indirect Production

  1. Production is with a view of exchange
  2. Encourages specialisation
  3. It results in surplus production of goods and services
  4. It encourages invention and innovation
  5. Improves the standard of living of the producer

Advantages of Indirect Production

  1. It encourages specialization in production
  2. It improves the skills of the producer since tasks are done repeatedly
  3. Better quality goods and services can be produced
  4. The rate/speed of production is high
  5. It leads to creativity, invention and innovation in production
  6. Variety of goods can be produced
  7. It leads to high living standards
  8. It promotes trade
  9. It promotes peace and understanding among people through trade
  10. It promotes division of labour

Indirect production encourages interdependence among countries as they engage in trade.

Levels of Production and Related Activities

There are three levels of production;

  • Primary level
  • Secondary level
  • Tertiary level

Primary Level

  • This level is also known as the extraction level. It involves the extraction of goods from their natural setting.
  • The products of primary level are either used in their original form or are processed further to make them more useful. E.g. water can be consumed in its natural state while wood must be processed into furniture in order to be useful.
  • At this level, human beings do not create goods.
  • Examples of activities involved in primary production are;
    • Mining
    • Farming
    • Fishing
    • Lumbering

Secondary Level

  • This level involves the transformation of raw materials into finished goods or into a more useful form.
  • This level includes manufacturing and construction activities.
  • Examples of manufacturing activities include;
    • Food processing
    • Textile and furniture making
  • Examples of construction activities include;
    • Building houses
    • Construction of roads
    • Construction of railway lines

Tertiary Level

  • This level of production deals with provision of services. These services may be classified into two;
    • Commercial services: these are activities are either or which assist trade to take place. Commercial services includes the following occupations; wholesaling, retailing, banking and insurance
  • Direct personal services: these are services which are rendered directly to the consumer (s). examples of occupations categorised under non-personal services include the following; nursing, teaching, legal practice and pastoral duties

Different Levels of Production and Examples of Occupations

Level  Nature Examples
Primary Extraction • Lumbering
• Mining
• Farming






• Maize milling
• Coffee processing
• Oil refining

• Bread making
• Textile manufacturing
• Chemical manufacturing

• Road construction
• House building
• Railway construction


Commercial services



Direct personal services

• Banking
• Insurance
• Wholesaling
• Retailing

• Teaching
• Hairdressing
• Medical care
• Nursing

Factors of Production and their Rewards

  • Factors of production are the necessary resources required in the production process.
  • Factors of production are categorised into four;
    • Land
    • Labour
    • Capital
    • Entrepreneurship


  • Land refers to all the natural resources below, on or above the surface of the earth.
  • Land is important in production because it provides space on which production takes place besides providing raw materials to be used in the production process.
  • Land earns a reward/remuneration/income in form of loyalty/rent/rates.

Its characteristics

  1. It is basic factor of production, i.e. without land production cannot take place
  2. Its supply is fixed .i.e. its size cannot be increased
  3. It is a natural resource
  4. It is subjected to the law of diminishing returns i.e. its productivity reduces with continuous usage.
  5. It lacks geographical mobility i.e. it cannot be moved. It is however occupationally mobile i.e. it can be put to several uses
  6. Its quality is homogeneous i.e. productivity varies from one piece of land to another
  7. Its productivity can be increased by increasing the quality and quantity of capital.

Labour (Human Resource)

  • Refers to the human effort applied in production. This effort can either be physical or mental or a combination of both e.g. a driver uses his hands, legs and brain at once while driving.
  • For any human effort to be regarded as labour, it must be aimed at production and it must be paid for.
  • The reward for labour is wages, commission or salaries.

Forms of Labour

  • Labour may take three forms;
    • Skilled labour
    • Semi-skilled labour
    • Unskilled labour
  • Skilled labour refers to people who have acquired the relevant skills for the job.
  • Semi-skilled labour refers to people who have acquired a certain level of skills for the job. Unskilled labour refers to people who have specialised skills for the job

Characteristics of Labour

  1. It is a basic factor of production
  2. It cannot be stored
  3. It cannot be separated from the labourer
  4. It is saleable
  5. It is human, with ability to think and capacity to get annoyed
  6. Labour is mobile i.e. a labourer can move from one place to another or from one profession to another.

Ways of Improving the Efficiency of Labour

  1. Giving workers relevant tools and equipment
  2. Paying workers well
  3. Appropriately training workers
  4. Improving the working conditions
  5. Giving workers incentives
  6. Providing job security
  7. Giving proper job descriptions to workers
  8. Giving workers fringe benefits such as housing, free meals etc.


  • Capital refers to all man-made resources used in production of goods and services. However in production, capital refers to those goods that are produced in order to be used in producing other goods and services.
  • Capital includes machines, tools and equipment.
  • Goods that are used in the production of other goods and services are known as capital goods or producer goods.
  • The reward for capital is interest.

Characteristics of Capital

  1. It is man-made
  2. It is a basic factor of production
  3. It is subject to depreciation
  4. It can be improved by the use of technology


  • Refers to the ability to organise other factors of production in appropriate proportions for effective production.
  • Entrepreneurship is conducted by an entrepreneur
  • The entrepreneur incurs all the costs of production
  • The reward for entrepreneurship is profit


Functions of an Entrepreneur

  1. He controls the business
  2. He starts the business
  3. He makes all decisions
  4. He acquires and pays for all the factors of production
  5. Bears all the risks and enjoys all the profit
  6. Incurs the cost of production i.e. he pays for expenses such as water, electricity, stationery and postage
  7. He owns the whole project

Division of Labour and Specialisation

  • Division of labour: this is where the production process in divided into stages and each assigned to an individual or a group of persons. E.g. the process of producing bread may divided into weighing, mixing ingredients, baking, packaging and selling and each of these areas assigned to certain individuals or groups of individuals
  • Specialisation: this is where a person concentrates in the production of what he/she can produce best.
  • Specialisation increases efficiency in the production of goods and services.

    NOTE: division of labour leads to specialisation.

Advantages of Specialisation and Division of Labour

  1. Increases output per worker
  2. Enables workers engage in areas where they are best talented hence producing high quality goods and services
  3. Specialisation encourages invention and innovation as the workers tries to come up with improved methods of production
  4. Division of labour encourages the use of machines hence improving efficiency
  5. Specialisation an d division of labour enables the worker to enrich his/her skills in a particular area
  6. Division of labour ensures that tasks are accomplished with speed hence saving time
  7. High quality and services are produced
  8. Reduces the amount of mental and physical effort used by a worker as he/she gets used to one routine
  9. It increases the rate/speed of production

Disadvantages of Specialisation

  1. Specialisation leads to monotony of work resulting in boredom
  2. Specialisation of labour may hinder creativity since it makes people work like machines
  3. Specialisation makes a worker depend on only one line of trade, therefore if his/her or the goods he/she lose demand, the worker becomes unemployed
  4. Specialisation and division of labour encourages the use of machines. These machines have replaced human labour resulting in unemployment
  5. Specialisation makes a country dependent on other countries for what it doesn’t produce
  6. Specialisation and division of labour brings people together resulting in social problems such as crimes
  7. The worker does not have pride in the final product because it results from the efforts of several people
  8. Failure of production in one stage affects the entire process of production

Classification of Goods and Services Produced in an Economy

  1. Free goods and economic goods
    • Free (non-economic) goods are those goods that are provided by nature e.g. air.
    • They are free, in abundance and priceless. Free goods have utility (usefulness) but no money value.
    • Economic goods on the other hand are those that are scarce in supply and have monetary value e.g. a car. People must work to obtain them. A price is paid to acquire them.
  2. Producer goods and consumer goods
    • Producer (capital) goods are those goods which are produced to be used in the production of other goods and services e.g. a jembe.
    • Consumer goods are those goods that are ready for final usage (consumption) e.g. food, clothes, medicine etc.
      NOTE: goods will be classified as consumer or producer goods depending on their intended purpose. For example vehicles used in factories are classified as producer goods whereas vehicles used for domestic purposes are classified as consumer goods.

    Features of producer goods
    1. They are produced to produce other goods
    2. Some may be durable in nature i.e. used again and again e.g. machines
    3. Some can only be used once in production e.g. raw materials

    Features of consumer goods

    1. They are produced for final consumption
    2. They are produced using producer goods
    3. Some may be durable i.e. they may be used again and again e.g. furniture, personal cars and radios.
    4. Some can be used once e.g. bread, sugar etc.
  3. Perishable goods and durable goods
    • Perishable goods are those goods that go bad quickly unless stored using special facilities. They include; tomatoes, meat, flowers etc.
    • Durable goods on the other hand are those goods that can stay for so long without spoiling e.g. tools, furniture etc.
  4. Public goods and private goods
    • Public goods are those that belong to no one in particular. They are either owned by the government or collectively by the public. Examples of public goods include; airports, public schools, public parks, roads etc.
    • On the other hand, private goods are owned by individuals or a group of individuals. The owners have exclusive rights to the usage of these goods.
    • Examples of private goods include; personal cars, mobile phones, private schools etc.
  5. Intermediate goods and finished goods
    • Intermediate goods are those goods which are still undergoing the production process e.g. sugar cane, wool, cotton, wheat etc.
    • Finished (final) goods on the other hand are those goods that have come out of the production process (outputs). Examples of final goods include; ugali, wheat flour, sugar clothes etc.
  6. Material goods and non-material goods
    • Material goods are tangible commodities such as food, desks, chairs etc.
    • Non-material goods on the other hand are intangible items or services such as teaching, nursing, banking etc.

Negative Effects of Production Activities on the Community

  1. Results in air pollution that causes airborne diseases
  2. Results in water pollution that causes water borne diseases
  3. May cause congestion in places where production activities take place
  4. Results in noise pollution that can cause hearing problems
  5. Leads to pressure on available health facilities
  6. Results in solid waste pollution
  7. Results in environmental degradation that may cause health problems
  8. Results in social evils in regions where production activities take place
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