What’s it: Production is the process of creating goods and services using resources. It adds value if the output value exceeds the input used value. In broader terms, it is an organized process of adding value to goods and services.
For physical products (goods), production means manufacturing. For services, such as banking or insurance, it means providing services to customers, such as when a bank makes loans to customers.
Production as an economic activity
Economic activity is generally divided into three groups: production, distribution, and exchange. We define these three as changing the physical form of objects, changing their location, and changing their ownership.
Production creates economic well-being by converting resources into goods and services to meet our needs and wants. It increases their supply, leaving us with more product choices regarding quality and price.
Also, production increases income because it uses labor as an input. When production increases, companies need more labor. The unemployment rate falls, and household income increases as more people work and receive wages.
The household then uses wages to satisfy needs and wants. They buy groceries or take vacations for fun. They can also save a portion of their income to meet future consumption.
Companies decide on the most efficient way to organize production for their particular product. In general, three types of production methods.
- Job production
- Batch production
- Flow production
The best production method depends on the type of product and the size of the market. Small companies operating in the service sector, such as plumbers, use job production because each customer has specific needs.
Meanwhile, mass and standardized products rely on flow production. Specialization and economies of scale allow firms to produce large amounts of output while saving costs.
Under this method, businesses create products individually. Each item is completed before the next item being produced.
This method is suitable for meeting customers’ special requirements and for making differentiated and high-quality products. For example, fashion designers make unique clothes for each of their clients. That way, they can charge a premium price.
However, this method has several drawbacks—high unit costs due to low economies of scale. Also, companies need skilled and creative employees to produce innovative and varied products.
Under this method, the company produces a batch of items together. When it has completed the first batch, the company then starts the batch for the next item.
Companies usually use this method to fulfill group orders. For example, the company set up a machine to make 50 bottled teas. When that was done, the company then adjusted it to make 50 bottles of coffee.
Under this method, the company divides the work into several assembly stations. Each station works on a specific task and part of the final product. So, when the work at one station is finished, the semi-finished goods go to the next station.
Assembly lines connect between stations using conveyor belts and expensive machines such as robotic arms. Apart from automation and using robots, companies rely on workers for specialized jobs, such as installing wheels in car production.
Flow production offers low unit costs due to high economies of scale. Most of the bulk and standardized products use this method.
Another advantage is that the company can produce large quantities of products. They divide the work into specific tasks. Each worker is specialized and performs one or two specific tasks.
However, production flow is less flexible to fulfill customer-specific orders. Workers may also get bored and lose motivation from doing the same tasks from time to time.
Another downside is the significant upfront investment. Companies rely on expensive machines and robots to automate some jobs.