Methods of Production: Overview

Click on the picture to enlarge

Overview of Production Methods

Methods of Production Video

Here's a good video that explains the three methods of production. However, it's only a preview video so not the full video is shown.

Production

(Akrani)

There are a few types of production:

• Primary 
• Extracting raw materials (e.g. Mining, fishing, plantations)
• Secondary
• Processing raw materials into finished or semi-finished goods (e.g. factories)
• Tertiary
• Businesses providing services (e.g. restaurants, manicures and pedicures)

Production Methods

There are a few ways or methods in which business use to produce goods and services. Though there are only the three basic methods stated here, they are actually more complicated and complex than what is stated below.

Job Production

This method of production is where a product is produced individually, one at a time, sometimes even by just a single person. This type of production is usually common in "custom-made" products such as smaller scaled products like tailor-made clothes, carpentered furniture, hair or bigger projects like construction of buildings or bridges.



Advantages of Job Production:

• The products and services are suited to fulfill the consumers and customers' needs and wants specifically.
• There is no need to stock goods, because all products are created differently.
• This form of production encourages mastery and autonomy. The workers or producers are not limited by specific sets of instructions or specifications, they are allowed to create each product uniquely. 

Disadvantages of Job Production:

• It may take a longer time, as each product has to be created uniquely for each customer.
• As each product requires different specific materials or costs, the unit production costs increases.
• Specialist equipment and machinery may need to be acquired, it may be expensive.
• Workers have to be specially trained. (Hair stylists, engineers and carpenters need to be trained in their field of work to produce high quality products that are worth selling at the market)

Example:

• Peter is a very skilled shoe-maker who makes shoes for a wide range of people, from businessmen to  dancers. 
• He makes shoes uniquely to suit the feet structure of each of his customers. Therefore, he is a very well-known shoe maker in the area and most of the people in the area seek his services. 
• Due to the custom-made shoes he produces, his consumers don't mind paying him a slightly higher price as they believe the shoes are of higher quality. Therefore, Peter is able to make quite a high income.
• However, due to the way he produces his shoes, he has to buy a lot of raw materials. As he practices autonomy in his business, he hardly lets his workers do much. Sometimes, when there are too many orders, he works over time to try to keep up with the orders but he does not allow his workers to help. All his workers are allowed to do is to keep the shop clean, take orders and cut the leather material.
• The way Peter has been working has taken an effect on his health. To solve this, he needs to train his workers to become apprentices or hire people who are already experienced in this field. The opportunity cost here is that the apprentices or the specialists hired may not have the same style as him or they may not be up to standard and the quality of the shoes produced may drop.

The diagram above shows how job production is like in Peter's business. A single shoe maker makes shoes for various consumers.

Batch Production

This type of production is where similar products are produced in different batches. Examples of this include creating the same type of watch in different colors, producing different flavors of ice-cream, or baking different kinds of bread. 

How does it work?

Using the watch example, a batch of 100 red watches are produced first. When the red watches are done, the workers switch to making another batch of 100 yellow watches, then green watches etc. After that, these products will all go through the same packaging process before being sent to shops and other buyers. Though they are all of the same basic product, they are produced in different batches according to their different colors.

Flow chart showing batch production of different colored watches. 

Batch production can also be used in baking different types of bread. 

Advantages of Batch Production:

• It is very suitable for similar basic products with slightly different attributes so the same machinery and skills can be used to create a variety of products.
• Due to the variety of products, the workers are more motivated and satisfied. This is because they are not stuck at doing the same things all the time. 

Disadvantages of Batch Production:

• There may be higher production costs to produce variations of the product.
• When changing to produce different batches of products, it may cost time.
• Slightly different machinery and skilled laborers may still be needed, and it will cost more.
• There is a need for storage space to store raw materials and finished goods.

Flow Production

Flow production is what most people think a production in a factory is. It is also related to mass production. Flow production is where each worker has a specific role or task just repeats it over and over and over again. All these workers doing different tasks will make up the production line to produce a specific product. 

Example: Producing chocolate bars.

Advantages of Flow Production

• Huge amounts of the same standardized products can be produced in a short amount of time and economies of scale can be achieved too
• Increased of production efficiency
• The skills is needed is low, so the cost is lowered.
• The work in progress is also at a low level.
• As the products are all standardized, it cuts costs on the raw materials as well as the wages, therefore the low average costs will also allow the selling prices to be low.

Disadvantages of Flow Production

• A lot of raw materials is needed to keep up with the fast production line. Therefore warehouses and space is needed to stock up these materials.
• If the demand suddenly drops, there will be an overstocking of goods.
• The workers may not be very motivated as they are just repeating the same menial jobs over and over again.
• Setting up the production line and organizing the entire process may take time and it could be expensive.

Opportunity Cost

What is opportunity cost? Opportunity costs usually revolve around decision-making. In terms of consumers, it is the cost of choosing one choice over another. One you choose to buy one product over another, you loose the opportunity to use the product that you did not buy.






Most of the times, buyers and suppliers are limited by money and can only afford a few choices out of a wide range, therefore every time a choice is made there is an opportunity cost. Taking the simple example from the short comic above, the boy has $5 and he has three choices. He can either save his money to buy something of good quality that he really wants (though it may be more expensive), or he could buy a movie on tape that is not his first choice, or he could buy a used videotape that may be of bad quality (but it's cheap!). If he saved his money, the opportunity cost would be that he would not be able to watch any movies or TV shows on that day. If he had chose the second option, the opportunity cost will be that he would have to wait for a longer time save up to buy the movie he likes and miss the chance to buy the SpongeRob video on his birthday.

Similarly in supply and demand, decisions have to made all the time. Buyers have to choose which product they want to buy and negotiate with suppliers for a good and reasonable price. However, when they choose one, the alternative will be forgone. When making decisions, businesses have to choose the choice that is the least costly and that it will benefit them in the future.

Here is a short role play video explaining opportunity cost. Though this example is not present in real-life businesses, it is easy to relate to. It's about a guy who has a big test the next day and needs to study for it. But he has a date with his girlfriend on the same night and she will be mad if he chooses his studies over her. Which will he choose? A good time or a good grade?

Determinants of demand and supply

courtesy of Bill Watterson

The demand and supply curves of the global market are every changing and they move up and down, left and right on the graph all the time. Always finding a new equilibrium. What causes these curves to move?

Determinants of Demand

• Trends, tastes and fashions. When a product is popular, the demand increases and the price may become a little inelastic and it will increase.
• The number and price of related goods. 
• Substitutes. When the price for a certain type of of product increases, consumers would usually opt for the cheaper alternative that is similar to that product. For example, liquid soap and bar soap. When the price for liquid soap increases, more consumers would buy bar soap instead and this will increase the demand of bar soap.
• Complements. When the price of a type of product increases, other products that rely on will also suffer a drop in demand. For example, if the price of televisions increases, the demand for them may drop. Consequently, DVDs and VCDs will also suffer a drop in demand. If there aren't any televisions, how can you play DVDs? 
• Income. When the income of consumers rise, the demand for products will also rise as the opportunity cost of buying products will decrease. If the opposite happens, in which the income of consumers decrease, the demand for products will then increase and people may switch to buying products that seem to be 'cheaper' and of 'lower quality'.
• Expectations of future price changes. When consumers predict that prices will increase in the future, they will buy early and therefore increase the demand at that certain period of time. If the predict that prices will fall, the demand will then drop as people would buy less and wait for the prices to drop.
• Population. As explained in earlier post (What to produce?), the target consumer population can increase or decrease the demand of certain products.

courtesy of Eric Allie

Determinants of Supply

by Brian Girouard

• Costs of production. If the costs of production increases, the supply of goods will decrease. Causes of production costs increase includes:
• Changes in input prices: wages, raw materials
• Changes in technology: machinery
• Organization changes that lead to a change in efficiency
• Governmental policies like taxes and subsidies
• Profitability of alternative goods in supply. Businesses often produce more than one type of good. So if one type of product gains more profit than the other, the supply for that product will increase. For example, when selling shoes and socks. If shoes gain more profit, than the supply for shoes will increase while the supply for socks will decrease.
• Nature:
• Natural disasters
• Weather and climate
• These causes cannot be prevented but if they are severe they can really cause a lot of damage or change to the supply and production line.
• Expectations of future prices. As stated previously in the determinants of demand, the same applies to the supply as well. If a product is selling very well and is expected to be gaining a lot of profit, more of this product will be produced and stocked up. The same applies vice versa. 
• Profitability of goods in joint-supply. Just like the one of the determinants of demand, if a complementary product does very well, similar products will also increase in supply. For example, if computers are selling very well, the supply for other computer devices like keyboards, thumb drives and CDs will increase in supply as well. 

Demand and Supply - Price Equilibrium

In the market, both the demand and the supply curves have to meet at a certain point where both parties (consumers and producers) are satisfied with the price and are willing to buy and sell the products. This is called the price equilibrium.



In the graph above, it shows that both lines meet at a certain point of intersection at 0.35 pounds and a quantity of 250. This means that the producers are willing to produce 250 units of goods at the price of 0.35 pounds each while the buyers are willing to purchase 250 unites of goods at the price of 0.35 pounds each. The equilibrium shows that both parties are in an agreement. One is willing to sell a certain amount at a certain price while the other is willing to buy a that amount at a the same price.
_________________________________________________________________________________



If the price demanded by the supplier was 0.40 pounds each, the price will not be at equilibrium and the buyers may not buy the supplier's goods due to the high opportunity cost. The price would be hire than the demand. In this case, it is called an excess supply and in order to bring the price back to equilibrium, they will have to negotiate a lower price.



On the other hand, if the buyer insists on buying 300 units but only wants to pay 0.25 pounds, the price will once again be out of equilibrium and the producers may refuse to produce and sell. According to the graph, the supplier will only sell their goods at 0.25 pounds per unit for only 150 units, not 350 units. (in short, the consumer may be asking for too much for a cheap price) This is called excess demand. To resolve this, the price has to rise.

Works Cited
Tutor2u. "Gcse Economics - Demand and Supply - Price Equilibrium." GCSE Economics. Tutor2u, n.d. Web. 11 Dec. 2012. <http://www.tutor2u.net/economics/gcse/revision_notes/demand_supply_price_equilibrium.htm>.

Demand and Supply

Demand and supply are two elements that affect the price of goods in the market.

Demand

Demand is how much a product is wanted by consumers. As explained previously in the post on price elasticity, the demand is oftentimes very dependent on the price of the product. Though sometimes it may be due to other reasons (popularity). The relationship between the demand and the price is called the demand relationship. 

Below shows how a typical demand curve will look like. The gradient of the curve is always negative. The price is always on the y-axis and the quantity on the x-axis.

The law of demand is pretty simple and logical. The lower the price, the higher the demand and vice versa. As the price increases, the opportunity cost of buying the product also increases and therefore less people would buy the product. As shown in the graph above, point A has a very high price, but therefore the quantity sold is very low, compared to points B and C, where the prices are slightly lower but the demand is high.

Supply

The supply is how much the business/market can produce and supply to the consumers. The quantity of goods they supply are dependent on how much they are offered for the goods. Thus, the supply is once again dependent on the price as well...Seems like everything is dependent on the price. 

The relationship between the price and the goods and services supplied is called the supply relationship.

The supply curve is the opposite of a demand curve, the gradient is positive. 

The law of supply is also quite the opposite of the law of demand. The higher the price offered, the more the producers will supply. This is logical, as the higher the amount of money paid, the more you would want to produce and supply. The higher the money earned, the more profit these companies can make.

Works Cited

Investopedia.com. "Economics Basics: Supply and Demand." Investopedia – Educating the World about Finance. Investopedia.com, 2003. Web. 11 Dec. 2012. <http://www.investopedia.com/university/economics/economics3.asp>.