In economic terms the word “production” takes on new meaning. Production is the creation of economic value—making goods or services to satisfy human wants. There are four factors or necessary elements in every product or service: land, capital, management, and labor.
Land includes all of the natural resources used in our economy. Nature has given us a limited or fixed amount of natural resources and raw materials so wise use is essential. The United States uses more of the world’s land resources than any other nation.
Production requires capital. Capital is money used to buy tools and equipment to make goods or provide services. Capital goods are machines, tools, buildings and the like, used in production. These are a form of wealth. Capital goods are used to make more of the things that people want. Each business must utilize its capital wisely. Decisions about how to use capital are made by each company’s management.
The men who run a business are called managers, or “management.” They are the people who make the decisions which determine whether the business will succeed. But when management makes decisions it must take risks. Risks are taken with the hope of increasing profits.
The total amount of money received from sales of goods or services is called gross income. Out of this gross income the business pays for all of its production costs. The amount left over is called net income. Most businesses will probably set aside part of this net income for future needs. The rest of this net income is called “profits.” Profit is what is left after all obligations have been met.
All businesses need workers. “Labor” includes all the people engaged in the production process except the enterpriser himself. The various types of work that people bring to the process lead us to classify workers in seven general categories.
Professional
workers include most educated workers, such as teachers, nurses, lawyers, and doctors.
Self-employed workers
work for themselves, in small businesses or on farms, for example.
Service workers
provide us with services (barbers, waiters, tailors).
Clerical workers
work in offices as secretaries, typists, or clerks.
Skilled workers
are those whose jobs require long training and special skills, such as plumbers, electricians, or carpenters.
Semiskilled workers
need only a short training period: they include bus drivers, telephone operators, and some factory workers.
Unskilled workers
perform jobs requiring little or no training, such as delivery or freight handling.
One reason that the American economy is prosperous is the use of methods of mass production. Mass production means producing huge amounts of goods rapidly. There are three basic elements necessary for producing goods by mass production: machine tools, standardized parts, and division of labor.
Machine tools or machinery is carefully built to turn out parts that are exactly alike. The identical parts are called standard parts. Because they are identical they are interchangeable, making for easier assembly and repair. Each part becomes a replacement part for others. The principle of division of labor provides each worker with the opportunity to become a specialist at his job. The use of machinery, standardized parts, and division of labor led to increased production early in America’s history. But production was slow at first, because machinery was operated by muscle power. A new search for a more efficient source of power began.
Americans first turned to water power. The force of falling water was used to operate machines. Many factories were located near streams. Dams were constructed and water wheels used to supply power. The next significant change took place when a Scottish engineer, James Watt, developed a practical steam engine. Soon steam power replaced water power, as the principle source of power during the 1800’s. By the 1900’s several new sources of power had been developed. The internal combustion engine, operated by exploding gasoline fumes, was used for automobiles and small machines. But none of these sources of power was suitable for mass production.
Early in the 1900’s electricity began to be used widely. At first it was used to light homes and streets. Today it is used in an ever-increasing variety of ways. Electricity is the source of power used in almost all American businesses and factories.
American businesses, industries, and scientists are still seeking new sources of power. Many experts believe that atomic energy is the answer to our energy needs. Atomic energy now powers ships and submarines. Atomic energy plants are being constructed and used to produce electricity. Nuclear energy is not problem-free, since it raises the questions of public safety in case of accidents and what to do with radioactive waste. As these issues are dealt with and as the cost of atomic energy decreases, its use will probably increase.
Scientists are exploring still other sources of power. One of the greatest sources is the power of the sun. Solar energy is already being used to produce electricity and supplement hot water heating systems. At the present time, solar energy is too expensive for the average consumer. But as technology progresses, solar energy may become more practical.
The production of goods is only part of our economic picture. Mass production depends upon efficiently transporting goods to markets. Moving goods to market is called marketing. Early in our history, Americans realized the importance of a good transportation system. They utilized lakes and rives, and built canals, roads, and railroads.
Railroads served as our main form of transporting people and freight for over fifty years. American railroads operate on standard gauge tracks. This means that they are all the same distance apart, enabling any car from any company to use them. Today, the railroads must compete with other forms of transportation. In passenger transportation buses, automobiles, and airlines have grown rapidly and have overtaken railroads. By the late 1960’s planes traveled over 90 billion passenger miles annually, intercity buses over 844 million miles, and trains only 170 million miles.
Railroads have also lost the lead in transporting freight, both raw materials and finished products. In 1926 railroads carried 3/4 of all freight business. Now they carry less than half. More and more products are being moved by large trailer trucks. Goods that require rapid transportation use air freight. Many large bulky goods are using river, lake, and ocean shipping in increasing numbers. Today railroads, with government aid, are trying to make a comeback.
America’s primary means of transportation is the automobile. The car is the leading form of passenger travel and usually transports goods on the last part of their trip, from the store to our homes. Roads have changed our the years from dirt to asphalt and concrete superhighways. We now have over 3.5 million miles of roads. Some of our new roads are toll roads, roads on which drivers must pay a fee. Other new roads are limited access superhighways. “Limited access” means that drivers can enter the highway only at certain points. This eliminates cross traffic and allows traffic to flow with more regularity. Our Interstate Highway System makes use of such highways. These roads are very expensive, costing on an average more than $1 million per mile. The federal government pays 90% and the states pay the remaining 10%.
Mass production depends upon mass marketing. Mass marketing means moving huge amounts of goods efficiently so as to reach millions of people.
Products usually pass through several hands before reaching the consumer. Businesses sell the products to a wholesaler or a middleman. The retail stores sell the products directly to the public. Often the cost of marketing a product is equal to or greater than the cost of producing the product.
Mass marketing is well illustrated by the supermarket, a large retail store selling hundreds of different kinds of food. Customers push carts around aisles making their own selections. Usually there is no clerk to wait on them. After the selections are made the customer brings the items to the cashier to pay for them. This kind of marketing is called “self-service.” It is an efficient way to sell goods. Customers can choose exactly what they want. It is cheaper because it requires fewer clerks.
Standard packaging of items also increases the efficiency of self-service markets. “Standard packing” means that goods are sent from the factory already wrapped. Items are wrapped, weighed, and put in attractively labeled packages.
The one-price system is also a feature of our mass marketing. Under this system the selling price is put on each item before it is offered for sale. First used over 100 years ago in Philadelphia by Wanamaker’s Department store, this practice eliminates bargaining to get the best price.
Chain stores, retail stores owned and operated by a company that has many stores, often eliminate the need for the wholesaler. They, in many cases, buy directly from the producers at low prices and in large quantities.
Smaller retail stores also play an important role in our economic picture. These stores often offer services that bigger stores cannot afford to offer. They often will take orders by telephone and even may deliver to your door. They may handle goods which are unique or not in great demand. They may specialize and offer a specific expertise that a large department store cannot.
Throughout this unit the word “consumer” has been used often. At this point we should investigate what a consumer is and how to be a good consumer.
We are all consumers of customers. A consumer is one who buys or uses products or services. America’s businesses spend millions of dollars annually in advertising their products, trying to convince us that their products are the best and that we need their products. Some think up a clever slogan about their products hoping we will remember it when it comes time to go to the store.
Advertisers are not always perfectly honest about their products, which makes intelligent shopping more difficult. Some shoppers do not try to learn to be good shoppers. They are called “impulse” buyers. They buy things without planning to, on the spur of the moment. They make purchases whether they can afford to or not.
There are a number of ways to get more for your shopping dollar. A wise shopper will look for advertisements of sales. A low price does not always mean a bargain. A product is not a bargain if you can’t really use it or if it is poorly made or lacking a proper guarantee from an established company. “Caveat emptor” is an old expression that it is well to remember. It means “let the buyer beware.”
Good shoppers are able to judge good price and good quality. Some do this by shopping at stores which guarantee everything they sell. Others shop around or do comparison shopping to find the better bargain. Some people buy only brand-name goods. These are goods known to most American consumers. They are usually products from large corporations that spend a lot of money to develop products of good quality and they stand behind them.
A good shopper also studies the product’s labels. The U.S. government requires most of these labels to help consumers judge the content and quality of the product. Labels may also be deceiving. Such terms as “pre-shrunk” or “highest quality” mean very little, whereas “sanforized” tells you that a garment won’t shrink more than one percent.
Today there are a number of organizations that protect or aid consumers. Some examples are the Better Business Bureau, the Federal Trade Commission, the National Bureau of Standards, the Department of Agriculture and the Postal Service. There are also some private organizations that help consumers, most notably Consumer’s Research and Consumers’ Union.
Once you have made your decision about what to buy, you must decide when to pay for it. You can pay cash right away, or charge it or buy it on an installment plan.
If you pay cash you are likely to be careful before spending your money, since you must pay in full at the time of purchase. Sometimes paying cash may get you a discount.
A charge account is a form of credit that stores give to their reliable customers, allowing them to make purchases at any time during the month and to pay for them later. The customer is usually expected to pay the bill within thirty days. A charge account is usually given to anyone who has a steady job and pays bills on time.
There are both advantages and disadvantages to charge accounts. Charge accounts are an easy way of buying things. They provide an accurate record of what you bought and how much you paid. You are able to purchase items without any money, enabling you to take advantage of sales. It also is easy to have things exchanged. If you pay your bills regularly, having a charge account enables you to establish a good credit rating. A credit rating tells how well a customer pays his bills. A good credit rating is important when applying for a loan or a mortgage.
An installment plan is similar to a charge account. A customer may buy an item without paying in full immediately, paying a “down payment” in cash. The remainder or balance is paid in a number of payments or installments over a period of weeks, months, or possibly years. Larger purchases, such as refrigerators, furniture, or cars, are often bought on an installment plan. Buying on the installment plan increases the total cost.
In addition to the normal cost the business adds a carrying charge. This charge helps the business pay for bookkeeping and mailing bills. Sometimes interest is also added to the payments.
Before using an installment plan one would be wise to try and save for the item or check with local banks for a loan. It may be cheaper to borrow from a bank than pay the installment payments. A large down payment also reduces the size of the installments. Before buying any product be sure that you want and need it.
Charge accounts and installment plans can be used improperly. Often, they lead to impulse buying. The convenience of the credit may discourage comparison shopping. Both plans of buying, unless used wisely, can lead customers to overextend themselves financially. Failure to pay for items will result in the store’s suing for the balance or repossessing the goods, and may ruin the buyer’s credit ratings.