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INDUSTRY

 

industry

An industry is a group of businesses that produce a similar product or provide a similar service. For example, companies in the automobile industry manufacture cars and trucks. Firms in the banking industry make loans, handle investments, and provide other financial services.

There are thousands of industries. They include advertising, construction, farming, meat packing, mining, and radio and television broadcasting. Many industries change a raw material into a useful product. For example, the steel industry turns iron ore into steel. Some industries, such as railroads and trucking, move goods from place to place. Other industries provide such services as electric power, health care, and telephone communications.

The word industry also refers to all businesses together. In this sense, industry provides us with almost all our clothing, food, shelter, and other basic needs. Industry also helps make our lives healthier and happier by providing entertainment, labor-saving appliances, medicines, and many other things.

Although industry enriches the quality of life, it sometimes has harmful side effects. Factories can pollute the air and water and endanger our health. Machines make noise that is often unpleasant and may even damage hearing. Also, the rapid growth of industry may use up the world's supply of easily obtainable petroleum and natural gas.

This article discusses what industry needs for production, how industry varies around the world, and the problems and challenges faced by modern industry. The article also describes how industries are classified. To learn about the development of industry,

What industry needs for production

The experts who study industry use the term output for any item or service that an industry produces. An output could be a bolt of cloth, a refrigerator, or legal advice. To produce an output, a business uses such inputs as workers, machinery, and raw materials. The amount and quality of the output depend on the amount and quality of the inputs and on how well a producer uses them. Inputs are also called productive resources. Industry requires five basic inputs for production: (1) natural resources, (2) capital, (3) labor, (4) management, and (5) technology. Some experts list only three or four inputs because they consider management a form of labor or technology an aspect of capital. The total output divided by the total amount of labor used to produce it is called the rate of labor productivity.

Natural resources include lumber, mineral deposits, soil, sun, water, and wildlife. Resources are vital to agriculture, fishing, mining, and certain other industries. However, service industries, such as banking and insurance, require few of the earth's resources. In addition, some industries can substitute plastics and other synthetics for natural materials.

The supply of certain natural resources is limited. These resources are called nonrenewable. For example, the earth has limited deposits of coal, natural gas, and oil. Once used, they cannot be replaced. Other resources, such as fish and forests, are renewable. People can ensure a continuous supply of fish and trees by restocking bodies of water with fish and planting trees.

Capital has two meanings in connection with industry. (1) It refers to the money that a firm needs to hire workers, buy supplies, and pay bills. This money is called working capital. (2) Capital also means capital goods-that is, buildings, machinery, tools, and other goods that provide productive services over a period of time. In a bakery, the oven is a capital good, but flour and yeast are not. Some industries require a large investment in capital goods in relation to other expenses. Such capital-intensive industries include the electric power and the petroleum industries.

To increase production, industry must acquire more capital goods. However, the production of capital goods uses inputs or resources. To develop its industry, a nation must first use some resources to produce capital goods. Industry must give up the other goods that those resources could have produced. The use of resources to produce capital goods is called investment.

A business can raise capital in three ways: (1) by borrowing money from a bank, (2) by issuing and selling bonds, and (3) by selling stock. When a business borrows from a bank, it promises to repay the loan with interest. A business can raise capital from investors who are willing to buy bonds issued by the business. The business promises to repay the value of the bond plus interest to the bondholder.

Another way of raising capital for business expansion involves selling stock in the business. The people who buy stocks are called stockholders. A business is not obligated to repay the money to stockholders. Instead, in return for their contribution, stockholders become additional owners of the business. Their ownership is represented by the shares of stock that they own. Although stockholders receive no repayments or interest from the business, they often receive dividends from the business. Dividends are a share of the profits from the business, and are paid according to the number of shares owned by a stockholder.

Labor is the work human beings do to produce goods and services. All industries require labor. However, some industries require far more money for labor than for other inputs, such as machines or materials. Such labor-intensive industries include accounting, law, and most other service industries.

The quantity of labor available to industry depends on several factors. These factors include the size of the population, the proportion of the population working or seeking work, and the hours each person works.

Labor also varies in quality. People differ in their inherited abilities and acquired skills. For these reasons, they differ in what and how much they can produce and in how skillfully they do their work. Education and training can increase a worker's skills. But education and training, like the accumulation of capital goods, require a present sacrifice to gain an expected future benefit. For this reason, the skills of the labor force are often referred to as human capital.

Management is a special kind of labor that makes business decisions. Managers decide such matters as what and how much to produce, which markets to serve, how much to advertise, and what prices to charge. They employ or manage the other inputs.

Managers of most businesses want high profits in order to pay high dividends to investors. For this reason, they aim to keep costs as low as possible. They also want to set high prices to gain high revenues. But competition within the industry often prevents them from doing so. Generally, a business will not increase the price of its output if its competitors will not increase their prices. If a business sets its prices higher than those of its rivals, many of its customers will buy the output of its rivals.

An important decision managers make is their choice of input-mix-what combination of capital, labor, and raw materials to use in production. The object is to keep production costs as low as possible. If labor costs are high, for example, a firm may invest in automatic machinery so that fewer workers are needed to accomplish the same task. If labor is cheap, the company may decide to employ extra workers instead of buying a machine to do the job. The combination of inputs that permits a firm to produce its goods or services at the lowest possible cost without reducing quality is called the most productive, or optimum, input-mix.

The goal of keeping production costs low also affects a company's choice of location. The resources an industry needs and the customers it serves are rarely close to each other. As a result, a business must transport inputs, outputs, or both. A business also tries to keep transportation costs as low as possible.

Transportation costs are based on weight and bulk as well as on distance. The location a company selects may thus depend on whether the company's product is heavier or lighter than the materials used to make it. The soft drink industry, which adds water to other ingredients to make its products, is an example of an industry that produces weight-gaining products. Soft drink companies choose locations near their customers. The paper and wood pulp industries are examples of industries that produce weight-losing products. Many such industries are near sources of raw materials.

Technology refers to a society's knowledge of machines, materials, techniques, and tools. A society can encourage technological progress by using more resources for such activities as education and research. However, gains in technology, like increases in capital, require a present sacrifice in order to achieve a future gain. For a detailed discussion of this aspect of industry,

INDUSTRY
 
What industry needs for production
How industry varies around the world
How industries are classified
Industrial Organization
Industrial Revolution
Life during the Industrial Revolution
Spread of the Industrial Revolution
The steam engine
 


Contributor: William S. Comanor, Ph.D., Professor of Economics, University of California, Santa Barbara; Professor of Health Services, University of California, Los Angeles.
Source : World Book 2005

   
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