Chapter 11

Production of goods
and services
OBJECTIVES
• Understand the nature of production , cost of
prodution and rules of production.
• Enumerate the factors of production and the
criteria for selecting good supplier
• Explain the purpose of quality control and
inventory control.
• The creation of goods and services appear to favor
the big business. They have adequate funds,
machines, materials, modern technology and
management specialists to produce goods and
services at a lower average cost. Examples are the
multi-national corporations which dominate the
global markets.
• However, there are some market situations where a
small or even micro business has the comparative
advantage in the production of goods and services.
The Nature of production
• Production is the creation of goods and services. Or,
it is the creation of utility. Goods and services are
produced to satisfy human wants or needs. Others
define production as the process of converting
resources into goods and services.
• In transforming resources into products, the
principal actor is the entrepreneur. He decides the
proper combination of resources, such as the
application of more labor and less machine, or the
reverse.
Factors of production
Land - includes natural resources such as forests, mountains,
and bodies of water like rivers, lakes and seas.
Labor - refers to both physical and mental efforts like the works
of farmers, fishermen, workers, clerks, lawyers, teachers,
doctors, etc.
Capital -pertains to machines, equipment, buildings and other
physical resources which are used in the production of goods
and services.
Entrepreneurial ability - coordinates the other factors of
production such as land, labor and capital. It is the spirit of the
enterprise. Without such ability, the other productive resources
tend to be in efficient.
Input-Output Relationship
Input. Output
- money. - shoes
- machines. - bags
- materials. Technology - books

- manpower. - rice
- management. - houses
- information. - cars
Costs of Production
• Costs of production represent the payments for the
factors of production. These affect the ability and
willingness of entrepreneurs to produce.
• Producers must choose productive resources which
are abundant in supply, because these are much
cheaper than scarce resources.
• The total costs of production is the sum total of
expenses in producing a product or service. It is
also equivalent to the sum of fixed cost and
variable cost.
Rules of Production

TR=Total Revenue (income)

TC= Total Cost (expense)

When TR is greater than TC, produce more.

When TR is less than TC, stop producing.
When TR is equal to TC, maintain production.

The above rules apply in a long-run period. TR being more than TC

means profit. The opposite is business loss. When TR = TC, it is
breakeven. This means no profit, no loss. But there is payment for the
entrepreneur. Thus, it is still good to maintain production. Here is an
illustration of the components of TC:
Factors Payments
Land Rent

Labor Wage

Capital Interest
Entrepreneur Normal profit

Total factors Total cost of production

Under the short-run period, the rules of production
are:

When TR is greater than VC, operate.

When TR is less than VC, shut down.

Relevant Technology
• Technology refers to the process of transforming
resources into goods and services. Clearly, big
enterprises are capable of using high technology
which requires modern machines and less number
of workers. However, in our country such
technology is not relevant considering our
depressed socio-economic conditions.
•
Produce or Purchase
• In producing certain products, there are parts or
components that are needed. Is it better to
produce or purchase such components? Not a few
small businessmen just buy components for
economy. Producing components require the use of
resources, such as machines, money, equipment,
materials and technology.
• 1. The quality needed.
The standard of something as measured against
other things of a similar kind
• 2. The quantity demanded.
The total amount of a good or service that
consumers demand over a given interval of time.
• 3. Availability of supply.
Refers to the product or something that you can buy
any time.
• 4. Production requirements.
This is the most important deter minant whether to
produce or purchase the components in the production
of a product.
How to Purchase
• An entrepreneur has to buy his inputs for
production. This is not as simple as it appears. The
needed inputs must be available at the right time,
proper quantities, and at a minimum costs. To
ensure the above requirements, the entrepreneur
must select his suppliers and must have purchase
planning.
Here are the criteria for selecting good suppliers:

Price.
– The amount of money expected, required, or given in
payment for something.

Quality.
–The standard of something as measured against other things
of a similar kind; the degree of excellence of something.
Reliability.
– The quality of being trustworthy or of performing
consistently well.
• The entrepreneur can depend on various
mathematical models on how to optimize the
timing of orders and to manage ordering costs. A
good model is the EOQ (economic order quantity).
It determines when order should be placed.
EOQ=√2x5x0
. C
$ = usage in units per period
0 = order cost per order
c = carrying cost per units
Example:
S=160, 0=P5, C=P1

EOQ= √2 x 160 x P5
P-1
=√1,600= 40 units
Inventory Control
Inventories are stocks of goods and materials.
There are three types of inventories:

1. Raw-materials inventory. These are stockpiles of

materials for inputs of production.
2. Work-in-process inventory. These are partially
completed products that require further processing.
3. Finished-goods inventory. These are completed
goods for delivery to customers.
Scheduling
• Scheduling is the process of ensuring the delivery of
materials at the right place and right time. Such
materials can be raw materials, semi-finished goods
or finished goods. Raw materialist may be moved
from the storage facility to the work station. The
semi-finished products may be moved from one
work station to another work station. The finished
products may be transported from the warehouse
to the stores or customers.
The PERT (Program Evaluation and
Review Technique)
is used to monitor and control scheduling of
activities. Under PERT, all the major activities of the
project are first identified. The completion of each
activity is called event.
 PERT Diagram for Printing Book

Sample design
(2)
2 3 8
Cost estimate Cover proof approval
Book design (3) Cover preparation (1)
(6) (7)
Printing binding
Proofreading
(20)
1 Start 6
(10)
7 10 11
Finish
Manuscript evaluation Pages preparation
(12) Typesetting (6) Final proofreading
(30) (8)
4 5 9
Editing
(30)
Quality Control

• Quality control is a process of insuring that goods

and services are produced in accordance with their
designs and specifications. Enterprises which have
established their reputations for quality are very
strict on quality control.
• There are two ways to ensure the quality of
products. One is the formation of quality circle. A
group of employees officially meet to study and
solve problems of quality. Another is through
inspection.
Productivity
• Productivity is measured by the number of
products produced.
• Productivity is a product of various factors. It can be
the work place, such as lighting, ventilation and
sanitation.
• Employees are the most important productive
resources of any organization.