1. The Nature of Production – Adding Value
Now that you have identified a product and tried to think about the processes it has had to go
through to get to you, we can link this to a technical term used in business.
Many of you will have heard of VAT - What does VAT stand for?
The thing we are interested in is the 'Value Added' bit. Think back to your mind map or
diagram from the previous task. List five stages that the product would have had to go
through during its production.
Image: The production of a mug goes through a number of different stages with each stage
adding additional value. The price you pay reflects the total of the value added.
How does the value of the product change as it goes through each stage?
The table below helps to further illustrate the productive process.
Stage of Production
Inputs Used
Selling
Price
Value
Added
Quarrying of 20 tonnes of
clay
Machinery, labour
£500 per
tonne
£10,000
£5 per mug
£2.5 million
Moulding clay into 500,000
Machinery, labour, energy
mugs
Packaging of mugs
Boxes, paper for padding, labour,
machinery
£5.50 per
mug
£250,000
Display of mugs by shop
Land, labour, display shelves
£9.50 per
mug
£4 per mug

2. The Nature of Production – Adding Value
The table shows how the different stages add value to the product. The price that we pay in
the shops reflects these different stages. At each stage it is important to remember that the
product at the end of that stage is more valuable than it was before.
See if you can test your understanding of this by printing out and completing the table below.
It shows, in simplified form, the stages a loaf of bread goes through to get to us.
Stage of Production
Selling Price (per
loaf equivalent)
Wheat grown by farmer and sold to a miller
15p
Miller grinds the wheat into flour and sells it to a baker
27p
Baker mixes the flour with other ingredients to make the
dough and then bakes the bread - the baker then sells the
bread to a retailer
45p
The retailer displays the bread in the shop and sells it to
the customer
Value
Added
65p
Task
Value added is all about the value placed on the product by
the market as well as the cost of the inputs that go into
making something. Nike makes trainers. The cost of the
inputs that go into making a pair of trainers is relatively low.
They are mostly made in countries where the labour costs are
very low. But a pair of trainers can set you back over £100!
Explain where you think the most value is added in the
making of a pair of trainers and why.
Image: How much would you pay for this pair of trainers if the Nike 'tick' was not on them?
This might give you a big clue as to the value added - remember it is the value placed on a
product by the market - that's you and me!