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Microeconomics

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AFRICA NAZARENE UNIVERSITY
NAME: IAN GATHAIYA MUHORO
ID NO: 08JBT021
UNIT: MICROECONOMICS
UNIT CODE: BCM 104
LECTURER: PETER MUHIA
TOPIC: ANALYSIS OF THE FACTORS OF PRODUCTION
DUE DATE: 14TH JUNE 2012 PRODUCTION
INTRODUCTION
According to David N Hyman, (1989), production is the process of using economic resources or inputs in order to produce output. The transformation of raw materials into finished goods or services has been a major factor in any economy as this is the major attributes that has help build today’s economy since the beginning of most economies worldwide.
Production on its own is insignificant as there are several factors to consider when producing the end product. This is what is known as the factors of production.
FACTORS OF PRODUCTION
There are several factors of production to consider. They are;
a) Capital
b) Scarcity
c) Technology
d) Cost of production
e) Opportunity cost
f) Fixed cost and variable costs
g) Production possibilities
h) Resources
i) Price
The above factors each affect production in their own way. A deeper look into them will reveal each of these factors’ contribution to the production process.
A. Capital
Capital, according to Ronald M and Robert A, (2003), this is anything that is produced in order to increase productivity in the future. Along with human capital, there is physical capital, which includes buildings, machinery and other equipment. Capital can also be monetary which is required to boost production by enabling purchase or raw materials and the equipment required to process it.
Capital in more ways than one is a major factor as it affects any other aspect of production. Without it production cannot take place as capital provides the means for the processing to take place. Capital to most firms is the building block of any business as it acts like a base for the business to begin its business transactions and acts as a first step to its growth.
B. Scarcity
Scarcity is a concept that describes a situation where there is not enough commodity to meet everybody’s wants and needs. (Peter Muhia, 15th May, 2012). In cases such as production of goods, the lack of enough raw material for production of their finished good, leads them to limit their production capacity to a certain amount. They do so in order to minimize purchase cost in order to enhance profitability and also not to run out of production material necessary for production.
Scarcity of products also helps firms regulate their output. The regulation of output enables them to maximize on consumer purchase power and at the same time ensure the products availability to market at a controlled rated. Though scarcity may seem null and void to the service industry, it also affects them in more ways than one. If a service is expensive, the consumers will opt to take the cheaper option from another firm, hence leading to scarcity of consumer.
The service industry usually have to keep their prices at the same level as competing firms since they are competing for the same number of consumers who are scarce and tend to be drawn to the cheaper option.
C. Technology
According to David N, (1989), technology allows us to delay the sacrifice implied by scarce resources by increasing productivity of resources. Technology has revolutionized the production of goods and services. Technology is constantly improving; this is a major boost as it also improves the goods and services being offered. Technology has over the years been incorporated in firms to improve their production. So far it has enabled mass production of the scarce resources available. This has also led to a sizable increase in profits. It has also led to better management of the firm’s capital and other resources such as labor and distribution.
Though technology has led to improved production, it also comes with a cost as a firm has conceder maintenance cost and upgrading in order to stay ahead of the competition.

D. Cost of Production
According to Robert S. and Daniel L, (2000), cost includes the wages a firm pays its workers and the rent it pays for the office space (but is not necessary if the firm already owns the building). Part of this cost of production includes also purchase of equipment, purchase of raw material, transportation and more.
The cost that a firm attains during its production process will affect the profits, the firms pricing of its products, payment of wages, its acquisition of raw materials and more. The cost of production is a determining factor on how a firm plans its finances in order to ensure maximization of its resources without having to depleting them.
E. Opportunity cost
Opportunity cost is the cost associated with opportunities that are forgone by not putting the firm’s resources to their heist – value use. (Robert S. and Daniel L, 2000). A firm optimizes on its resources which were did not occur any cost, such as lack of renting office space, using cheap, efficient machinery that was less than what they budgeted for. The extra capital saved is used to boost the firms’ productivity and output.
These in most cases boost the firms’ profitability, but some of the firms tend use their extra capital to expand their businesses. Though some firms opt to keep the opportunity for a rainy day, such are when they require upgrading their equipment or employing more workers. This in turn boosts the products output which in return increase its profits.
F. Fixed cost and variable cost
According to Robert S. and Daniel L, (2000), fixed cost is a cost that does not vary with the level of output while variable cost varies when output varies. This two vary with time. Over a short period of time firms are obligated to fulfill their contracts and meet their respective payments. On the other hand, over long periods of time, firms are fewer obligations, these being payments are flexible and there are higher chances of firing of employees.
This two affect economic decisions depending on the time period. When fixed cost is implemented the economy is usually at a constant trend for example prices and consumption of products remain constant or if any of them rise the other also rise with it, but when variable cost is being implemented the economy tends to vary such as when the price of a product increases or decreases, the demand changes but will go up if prices fall or go down if prices rise.
G. Production possibility
It is a section the output opportunities these combinations allow and the resulting choices that all economies must make. (Robert S. and Daniel L, 2000), It basically examines how two products relate to one another and how consumers consume each product and how it affects the economy.
Usually this has minimal effect but it helps firms and governments to choose which product to consider to have more output and which product to produce least to minimize cost and wastage of resources
H. Resources
According to Robert S. and Daniel L, (2000), resources are combined to output of goods and services. They refer to the ability of a resource to produce output as that resource’s productivity.
The lack of resources such as labor, land and entrepreneurship and also raw materials can firm not to produce its output, which in return will cause the economy to fall depending on the importance of the output due to consumers not being able to purchase either due to its unavailability or due to a hike in the price. Necessities such as petroleum products if there is a shortage in crude oil, prices increase and this affects industries and also the normal consumers.
I. Price
According to Robert S. and Daniel L, (2000), price is the value put on a good or service to give it market value and to also give it cash value to allow consumers to make easy budgeted decisions on whether to purchase the product or not.
Price is an important facto as it affects most of the firms’ production decisions. In case the price of a good was increased the firms associated with that good would increase their production but if the price would be lowered the firms would reduce their productivity.
Though in some case some products are consumed more if the prices were low than when the price are high. Price also affects the firms decision to buy raw materials depend on their expenditure power and possible returns.

REWARDS OF PRODCUTION
Production reaps many benefits which help the firm grow. That is;
 Profits
 Increased productivity
 Improvement of productivity
 Better market share
 Increased consumer purchase.
Each of these rewards each is come by due to the factors of production. A closer look in to the rewards will help us understand them more.
1. Profits
When a firm gains profit or maximum profits, it attains the capability to hire more labor, buy new equipment, buy more raw materials or increase its production. It also can lead to expansion plans of the firm. Profits help strengthen a firms grip on consumers especially public owned businesses as their profits may be gazette hence drawing consumers to purchase their products more.
2. Increased productivity
The increase in productivity shows how much the firm is growing and their products are being consumed by consumers which led them to increase their production.
Increase productivity shows that a firm is financial stable and is able to increase its output without the worry of going to any financial risk. It also shows that the factors of production are favorable for them hence the consumers are consuming more of their goods or services. This also indicates that a firm’s profits have increased more than expected.
3. Improvement of productivity
When the factors of productivity favor a firm, the firm tends to improve the quality of their output. This will be capitalized on in that consumers will be attracted more to their product and would want to consume it as long as the quality satisfies the consumers demand.
When firms fail to improve the quality of their product yet facts are favorable, the consumer will opt to choose another firms product that is of better quality. Hence firms will always keep on improving their products quality especially when they running on favorable conditions.
4. Better Market share
When the firm experience a better market share, this comes about to a tally of all the related products from other firms and if there is an increase, it shows that firm is doing better than its competing firms due to the favorable factors of production that have enable them to capture the consumer interest.
This also helps a firm to maintain its popularity amongst the consumers even when they reduce their marketing strategies. For example Microsoft has been dominating the software market share, since the rise of other software companies such as Oracle; Microsoft has lost a lot of market and is now in competition with Oracle cooperation. Hence oracle is gaining a stronger market share.
5. Increased consumer purchase
This is comes about when a firms has fulfilled all the consumer needs and the factors of production has made the firms productivity better than competing firms. Hence consumers purchase the product more and in return increasing their profits. It also increases their popularity in the market and strengthens its stand in the market.
IMPROVEMENTS OF THE FACTORS OF PRODUCTION TO IMPROVE THE ECONOMY
 Capital – The governing bodies should be able to provide firms with assistance in attaining capital which will help the economy since the firms will be able to easily pay their taxes. Also the governing body should issue taxes that are reasonable for firms to be able to attain enough capital to improve their productivity.
 Scarcity – Firms should be conservative of the resources that they use in order not to deplete them. This will also ease on the economies resources. The firms should also find alternative resources in case there is a risk of shortage in order to maintain a steady flow of their finished product.
 Technology – firms should ensure they keep up with new trends in technology so as not to lag behind. In doing this, they will improve their production and output and this will boost the economy. This will also lead to increased production which will mean more revenue through taxing.
 Cost of production – if the cost of production is lowered, firms are able to increase their output which in turn will bring the firm more profits. Out of the increased profits the firm is able to increase its production and expand its market outreach hence improving the economy.
 Price – a governing body should be able to work with both public and private firms to regulate the price levels. This will help the economy not to depreciate too much or go into recession. The ability to control the price will also ensure that consumers have the purchasing power required to keep the economy strong.
In conclusion, the factors of production play an important role in the economy and should be sort after in order ensure firms continuous production of quality products and help keep the economy at a growing trend.

REFERENCE
David N. (1st Ed), Study Guide to Accompany Microeconomics, (1989), Central State University; Boston, United States of America.
Ronald M. and Robert A, (1st Ed), Microeconomics, Explore and Apply, (2003), University of Texas; San Antonio, United States of America.
Robert S. and Daniel L, (5th Ed), Microeconomics, (2000), University of California; Berkley, United States of America.
Peter M. Microeconomics Class Notes, (2012).

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