Factors that influence decisions on what goods and services to produce

Business studies study module

Certain factors have to be considered before committing a firm into production of either a new product, adopting or redesigning the existing product.

These factors include;

Whether the firm is product-oriented or market-oriented

Product oriented firms: This is when the nature of the product itself (its functions and unique qualities) are enough to make sure that the product sells e.g. when cars were first developed, its uniqueness sold it

Market oriented firms; These are firms that produce products that are meant to meet the consumer needs e.g. over time cars are being developed to suit consumer needs.

Level of competition

In order to survive in a competitive market, firms must come up with products that consumers prefer.

Firms may therefore develop products which are not currently available or copy rivals ideas and improve on them

  • Level of available technology

The level of technology has a strong influence on the product that a firm produces

New inventions and innovations often result in new products or improved products

-Improved technology may also reduce the costs of production. This means the same output maybe produced using less factors of production or more output may be produced using the same factors of production.

Management role

Senior management have the sole responsibility of deciding on what product to produce. A wrong decision may ruin rather than bailed the enterprise. The manager’s ability to design a viable product is therefore a vital factor in product development

Financial viability

In order to determine whether a product will be viable or not, the cost of production and the expected returns should be considered. Funds may only be approved for the product that promises long term benefits to the firm. So if the benefits of the product outweigh the costs, then such product will be developed and if not so, it will be dropped.

Amount and type of capital in the firm

Capital refers to machines, equipment, factories, plants and other human made aids to production.

Both financial and physical capital facilitates the production process. The amount of capital in a business will therefore influence what goods it can produce and in what qualities i.e. a firm with physical capital that is very specific may not be able to produce other type of products e.g. a clothing factory may not be able to produce any other goods such as cement.

Other factors may include;

-Need of the consumers

-Need for better quality or more fashionable product

-Need for an easier to market product

-Unmet needs

-Need for a product for which factors of production and technology are easily available

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