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Factors

of Production:

An economic term to describe the inputs that are used in the production of goods or
services in the attempt to make an economic profit. The factors of production
include land, labor, capital and entrepreneurship.

Land:
Land is defined as everything in the universe that is not created by human
beings. It includes more than the mere surface of the earth. Air, sunlight, forests,
earth, water and minerals are all classified as land, as are all manner of natural
forces or opportunities that are not created by people. It is also called as original or
primary factor of production. Normally, land means surface of earth. But in
Economics, land has a wider meaning. According to Marshal:
The material and the forces which nature gives free for mans aid, in land and
water and in air, light and heat
Components of land can be classified as:
On the surface: Like; soil, agricultural land etc.
Below the Surface: Like; minerals resources, rocks, ground water etc
Above The Surface: Like; climate, rain, space monitoring etc.

Peculiarities of Labour:
1. Free gift of nature:
Land is a free gift of nature to mankind. It is not a man-made factor but is a
natural factor.

2. Primary factor of production:


Though all factors are required for production, land puts foundation for
production process. Starting point of production process is an acquisition of land.
So, it is a primary factor.

3. Perfectly inelastic supply:


From society's point of view, supply of land is perfectly inelastic i.e. fixed in
quantity. Neither it can be increased nor decreased. Simply, you can not change
size of the earth. But from individual point of view, its supply is relatively elastic.

4. Grad ability:
Land varies from region to region on the basis of fertility. Some land are more
fertile and some are not at all. So, fertility wise, grading of land is possible. So, in
this way, land has grad ability.

5. A passive factor:

Land itself doesn't produce anything alone. It is a passive factor. It needs help of
Labour, Capital, Entrepreneur, etc. Like labor and entrepreneur, it doesn't work on
its own initiative. So it is a passive factor.

6. May have diminishing returns:


Here, return means quantity of crops. By using fertility of land with the help of
capital and labour continuously, returns gets diminished because of reduction in
fertility.

7. Has a derived demand:


Demand for agricultural goods is a direct demand and for producing such goods,
land is indirectly demanded. So, as a factor, land has a derived demand from
consumer's point of view.

8. No social cost:
Land is a gift of nature to society. It is already in existence. Land is no created by
society by putting any efforts and paying any price. So, for society, supply price of
land is zero.
But, because for the purchase of land or for its improvement, individual has to pay
certain price, so its supply price for individual is not zero.

9. Indestructible factor:
Land is durable and not perishable. It has a long life. No one can destroy the
land. The power of land is permanent and indestructible. Its fertility can be
destroyed as well as restored by human efforts.

10.

Perfectly Immobile:

Mobility means ability to move. Movement of land from one place to another is
impossible. Thus, physically, land is perfectly immobile. But it has certain
occupational mobility because it can be used for variety of occupations, like
agricultural use or for construction of houses.

11.

Site or location value:

Every piece of land has its certain site or location value. Such value depends
upon quality of its location. Land near to sources of raw materials and other
infrastructure facilities always enjoy high site value. Here accessibility of land plays
an important role.

12.

Earns rent as a reward for its use:

Rent is a reward for the use of land. Classical economists like Ricardo connected
rent with fertility of land whereas modern economists like Marshal
land Jevons stated that land earns rent because of its scarcity.

Labour:
As such, land simply exists. To make the gifts of nature satisfy our needs and
desires, human beings must do something with the natural resources; they must
exert themselves, and this human exertion in production is called labour. Usually,
the term 'Labour' is used for 'worker'. But it is not correct in Economics. Labour and
Labourer (worker) are two different things. Labour is an ability to work. It is a broad
concept because it includes both physical and mental work. It is a primary or
human factor of production. It indicates human resource.
Marshall Defines Labour as:
Any exertion of mind or body undergone partly or wholly with a view to some
good other than the pleasure derived directly from the work is called labour.

Peculiarities of Labour:

1. Inseparable from labourer:


Labour can not be separated from labourer. Worker sells their service and
doesn't sell themselves.

2. Labour is a perishable factor:


Labour can not be stored. Once the labour is lost, it can not be made up.
Unemployed workers can not store their labour for future employment.

3. Cost of labour:

It is easy to calculate production


But cost of producing a labour is a
incurred by parents on education of
them right from their birth date.
accurately.

cost of a commodity produced in an industry.


vague concept because it includes expenses
their children and other expenses incurred on
It is impossible to estimate all such casts

4. Active factor of production:


Other factors like land, capital are passive, but labour is an active factor of
production. Being a human being, this factor has its own feelings, likes and dislikes, thinking power,
etc. We can achieve better quality and level of production, if land and capital are employed properly
in close association with Labour. So without labour, we cannot imagine the smooth
conduct of production.

5. Heterogeneous factor:
No two persons possess the same quality of labour. Skills and efficiency differs
from person to person. So, some workers are more efficient than others in the same
job.

6. Imperfect mobility:
Labour doesn't move easily from one occupation to another because of several
factors like family and cultural background, limited educational and technical skills,
lifestyle, housing and transport problems, language barrier, adaptability to new
environments, etc.

7. Inelastic general Supply:


Supply of labour depends upon many factors like size of population, age and sex
composition, desire to work, quality of education, attitude towards work, etc. Thus,
supply cannot be changed easily according to changes in demand.
Hence, in general, labour supply is inelastic. But for a particular industry, it may
be relatively elastic.

8. Human capital:

Society makes investment in labour in the forms of education, health, training,


etc. This improves efficiency of labour. So, it is a human capital.

9. Trade unionism factor:


Workers collectively form their organization which is known as trade union. With
this, they bargain with their employers and there by secure higher wages and
better working conditions. Such trade unionism is not possible in other factors of
production like land, else works only in case of labour (labourer).

10. Derived demand:


Like other factors of production, labour has a derived / indirect demand. It
contributes to production process.

11. Mean as well as an End


Labour is a mean of production in factory. But outside the factory premises
worker may be a consumer of that product. So, he might be an end user of that
commodity.
Factors Determining efficiency of Labour:
i.

Racial Qualities: efficiency largely depends on the heredity.

ii.

Climate factors: cool Climate supports to carry out hard work.

iii.

Education: General and technical education also affect the work.

iv.

Personal Qualities: mental qualities like intelligence, alertness and activeness


also affect the work.

v.

Industrial Organization and Equipment: levels of Equipments and that of


organizations also influence the efficiency of work.

vi.

Factorys Environments: Airing level of crowding also have an effect on the


labour efficieny.

vii.

Union: Organised effort is more effective than working apart.

viii.

Social and political Factors: Factors like the fear to be removed from
employment and social security schemes also affect the efficiency.

Capital

Different subjects like Book-keeping, organization of commerce (O.C),


economics, etc., indicate different meanings of the term Capital. In book-keeping,
capital means amount invested by businessman in the business. In commerce
subjects like O.C and S.P, capital means finance or company's capital. But, in
economics, capital is that part of wealth which is used for production.
The word Capital is related with the following three terms:
o Wealth,
o Money, and
o Income

The relation among them is:

Capital is that part of wealth which is used for production. So, wealth is a broad
concept and capital is a narrowed Concept commodity is having features like
scarcity, utility, externality and transferability, it becomes wealth. A motor car has
all above features, so it is a wealth. When wealth is used in production process, it
becomes capital. If that car is used for taxi (cab) business, it becomes capital.
Therefore, any commodity as a wealth becomes the capital if it is used for
production.
Normally, capital means investment of money in business. But in economics
money becomes capital only when it is used to purchase real capital goods like
plant, machinery, etc. When money is used to purchase capital goods, it becomes
Money Capital.
But money in the hands of consumers to buy consumer goods or money hoarded
doesn't constitute capital. Money by itself is not a factor of production, but when it
acquires stock of real capital goods, it becomes a factor of production. For

production we need real capital and money capital but money capital acquires real
capital.
Capital generates income. So, capital is a source and income is a result. E.g.
refrigerator is a capital for an ice-cream parlor owner. But, profits which he gets out
of his business are his income.

Characteristics of capital:
1. Man-made Factor:
Capital is not a gift of nature. It is secondary as well as an artificial factor of
production.

2. Productive Factor:
Capital helps in increasing level of productivity and speed of production.

3. Elastic Supply:
Supply of capital depends upon capital formation process. Capital formation
depends upon savings and investment.

4. Durable:
Capital is not perishable like labour. It has a long life subject to periodical
depreciation.

5. Easy Mobility:
Movement of capital from one place to another is easily possible.

6. Derived demand:

Capital has a derived demand to produce finished goods which have a direct
demand. E.g. demand for raw cotton is derived from demand for cotton cloth.

Capital Formation:

The process of building up the capital stock of a country through investing in


productive plants and equipments. Capital formation, in other words, involves the
increasing of capital assets by efficient utilization of the available and human
resources of the country. It involves some stages to be consisted:

Stages of Capital Formation:

1.

Creation of Savings:
These resources play an important part in promoting development activities in
the country. These sources in brief are:

Voluntary Savings:
The savings which people make according to their will and power. In the underdeveloped countries, the saving potential of the people is low as a greater number
of them suffer from absolute poverty. So far as the rich section of the, society is
concerned, they mostly spend their wealth on the purchase of real estates.

Involuntary/Forced Savings:
Savings that government makes for meeting needs of the state in the form of
taxes compulsory schemes for lending to the government. If the people of low and
middle income groups are heavily taxed through various forms of taxation, their
power, (whatever little) to save will be burdened with taxes. The tax structure is to
be devised in such a manner that it should provide incentive to work, save and
invest for various levels of income groups.

Government Borrowing:
The volume of domestic savings can also be increased through government
borrowing. The government issues long and short term bonds of various
denominations and mobilizes saving from the general public as well as from the
financial institutions.

2.

Mobilization of Savings:
It means to use the domestic savings in further mobilization. I-e; transfer that to
the business people and the entrepreneurs.
In the developing countries of the world there are many resources which remain
unutilized and underutilized. If they are properly tapped and diverted to productive
purposes, the rate of capital formation can increase rapidly.

Enterprise:
Factors of production viz. land, labour and capital are scattered at different
places. All these factors have to be assembled together. This work is done by
enterprise through entrepreneur. This is an 'Organization Function'. Organization
function is the work of bringing the required factors together and making them
work harmoniously.
The term 'Entrepreneur' has been derived from a French word 'Entreprendre'
meaning to undertake certain activities. Entrepreneur has to bear risks and
uncertainties. For facing uncertainties he may get profit or may incur loss. This is
the 'Risk Bearing Function' and entrepreneur is the risk bearer.

Functions of an Entrepreneur:
An entrepreneur performs the following functions:
o He conceives the idea of launching the project.
o He mobilizes the resources for smooth running of the project.
o The decision of what, where and how to produce goods are taken by the
entrepreneur.
o He undertakes the risks involved in production.
o He is an innovator. He innovates new techniques of production, new products and
brings improvements in the quality of existing products. He is in fact the captain
of the industry.
o In a Joint stock Organization, the entrepreneurial functions are shared between the
shareholders, the directors and the top executives.

Qualities / Skills of an Entrepreneur


To be a successful and ideal entrepreneur, one should have certain qualities
or skills as given below:

1.Ability to organize:
He should be able to organize various factors effectively. He has to understand
all the aspects of the business.

2.Professional approach:
He should be objective and professional in approach.

3. Risk bearer:
He should be risk taker. He should be ready to bear risk and uncertainties.

4. Innovative:
Organizer should be innovative. He should adopt modern techniques of
production. He should not be reluctant to changes.

5. Decision Making:
One has to take right decision at a right time by showing his promptness. Quick
decisions are expected but hasty decisions shouldn't be taken. Delay in decisions
may increase cost of project and reduce the profits.

6. Negotiation skills:
Businessman regularly comes into contact with various persons like consumers,
workers, government officials, etc. so he should communicate tactfully.