NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

FACTORS OF PRODUCTION

PROJECT

ON

ECONOMICS

Submitted By: Submitted To:

Ayesha Choudhary Rajesh Kumar Gautam
Roll No.-2018BALLB065
Trimester I

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 TABLE OF CONTENTS
▪ CERTIFICATE……………………………………………………………03
▪ ACKNOWLEDGEMENT………………………………………………...04
▪ INTRODUCTION…………………………………………………………05
▪ CHAPTER I: RESEARCH METHODOLOGY…………………………..06
▪ CHAPTER II: DEFINTION….……………………………………………07
▪ CHAPTERIII: TYPES OF FACTORS…...……………………………….09
o Land………………………………………………………09
o Labour…………………………………………………….09
o Capital…………………………………………………….11
o Entrepreneur……………………………………………...11
▪ CHAPTER IV: POTENTIAL FACTORS.………….…………………….13
▪ CHAPTER V: EFFECT ON ECONOMY………….……………………..15
▪ CONCLUSION……………………………………………………………16
▪ BIBLIOGRAPHY…………………………………………………………17

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CERTIFICATE

This is to certify that project titled “Factors of production”, has been prepared and submitted
by Ayesha Choudhary, who is currently pursuing her B.A. LL.B.(Hons.) at National Law
Institute University, Bhopal in fulfilment of Economics – I course. It is also certified that this
is her original research project and this project has not been submitted to any other
University, nor published in any journal.

Date: 26th August, 2018

Signature of student: …………………………… ……………

Signature of research supervisor: …………………………….

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ACKNOWLEDGEMENT

I express my sincere gratitude to all those who helped me with this project. I am very grateful
to my Economics-I teacher, Rajesh Kumar Gautam, who had supported me throughout this
course by being an ideal mentor. I am also thankful to the Library Administration for
providing necessary books and texts needed for the completion of this project. Finally, I
would like to thank my parents, classmates and seniors for all the guidance they had
provided.

Ayesha Choudhary

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INTRODUCTION

Factors of production can be defined as the inputs used in the process of production of
various goods and services. Input is the starting point of every production activity. According
to Prof. Benham, "Anything that contributes towards output is a factor of production. 1" Mere
existence of anything doesn't make it a factor of production. To be a factor of production the
thing must contribute in the production process as a necessary condition. Dr. Alfred Marshall
labelled factors of production as "Agents of Production".

Different types of factors of production must cooperate with each other in order to produce an
output. A single factor is not sufficient for production of a given good or commodity. For
instance, to produce crops one need labour as well as land. Also, we need some capital so as
to buy fertilizers, seeds, pesticides etc.

Factors of production are basically productive resources. These productive resources can be
services of various groups of labourers, raw materials, or capitals supplied by financiers or
private enterprise of an entrepreneur who assembles the other factors of production and
employ them in profitable production of goods and services. The factors of production are
conventionally classified as land, labour, capital and entrepreneur. In economics, production I
defined as the process of transforming inputs (or factors of production) into valuable outputs.

There are two categories of factors of production: tangible and non tangible. Tangible include
land and capital. Non tangible resources include labour and entrepreneurs.

1Razeghi, P. (2002). Downregulation of Myocardial Myocyte Enhancer Factor 2C and Myocyte Enhancer
Factor 2C-Regulated Gene Expression in Diabetic Patients With Nonischemic Heart Failure. Circulation,
106(4), pp.407-411

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RESEARCH METHODOLOGY
RESEARCH PROBLEM
In this project, the researcher has tried to comprehend the meaning of the term factors of
production and their importance by studying the relevant books and articles about it.

RESEARCH QUESTIONS
• What are the types of factors of production?
• What is the role of factors of production in economic development?
• What are some other potential factors of production?
• How different schools of economics have defined and classified factors of
production?

HYPOTHESIS
All the factors of production are required in combination at a time to produce a commodity.
Factors of production help to determine the choice labour intensive techniques and land
intensive techniques.

CHAPTERIZATION
The detailed discussion on the subject matter will commence from chapter II. This chapter
explains and analyses the different definitions of factors of production provided by different
schools of economics. This helps us to build a basic premise for understanding the factors of
production. Then in the next Chapter, Chapter III the types of factors of production-land,
labour, capital and entrepreneur will be broadly discussed. Then in Chapter IV we discussed
some other factors which can affect production process. Then the analysis will conclude in
the final chapters, which analysis the effect of these factors on production. This adds a
practical element to the research paper and helps to fully understand factors of production and
their importance.

RESEARCH METHODOLOGY
The researcher has adopted doctrinal method of research.

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DEFINITION GIVEN BY DIFFERENT SCHOOLS

Different schools have different views regarding Factors of Production. Differences became
more prominent while deciding the importance of various factors of production.

Physiocracy
Physiocarcy is an economic theory developed by the 18th century enlightenment economist.
According to them Land (or natural resources) is the most important thing required for
production and welfare of nation. They priorities agriculture and other related activities and
only consider land as a factor of production.

Classical

The classical economists like Adam Smith, David Ricardo and their followers focused on
tangible resources as factors of production. They discussed the distribution of cost and value
among these factors. Basically they identified three factors of production:

• Land or natural resources — naturally occurring inputs like water, air, minerals, flora,
fauna and weather that are used in the creation of products. For use of land , payment is
made in terms of rent.
• Labour — human effort used in production which includes skilled as well as unskilled
labour. The payment for someone’s labour is done in the form of wages.
• The capital —Man made goods such as machinery, tools, and buildings are required for
production of various goods and services. They can be further classified as fixed and
working. Fixed are one time investments like machines, tools and working consists of
money in hand and raw material

Marxism

Marx considered the "elementary factors of the labour-process" or "productive forces" to be:

• Labour
• The subject of labour (objects transformed by labour): It refers to nautral resources and
raw materials

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• The instruments of labour (or means of labour): It refers to tools such as factory,
buildings, machinery and other man made articles which facilitate the production process
of various goods and services.

This view appears o be coinciding with the classical view, but here Marx established a clear
distinction between labour actually done and individual’s ability to work (labour power).

According to Marxian view, the key factor of production is labour, not labour power. Labour
power is a theoretical phenomenon whereas labour actually done is a practical term which
helps us calculate the actual contribution of labour in the production process.

Neoclassical economics

Neo classical economics started with the classical factors of production. However, the
economists here added some additional factors of production.

Below are the “additional” factors of production, as identified in neoclassical economics:

• Capital — This may include the financial capital or money raised through investments to
use other factors of production. However, generally, in economic sense "capital” denotes
the goods that can help produce other goods in the future. It refers to machines, roads,
infrastructure, schools, institutes, and other man made things which facilitate the
production of various goods and services
• Fixed capital — This includes machinery, factories, equipment, new technology,
buildings, computers, and other goods that are aimed to increase the production in an
economy in future.
• Working capital —This includes the unfinished goods that are to be used in near future.
They are also known as inventory. Many a times, money is also considered as working
capital. Basically the amount of working capital changes during the course of
production..
• Financial capital —This includes the money invested upon a business for production of
goods and services. In broader sense, it includes the borrowed money.
• Technological progress —Progress in technology lead to economic growth by increasing
the efficiency in the process of production.

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TYPES OF FACTORS OF PRODUCTION

There are broadly four major factors of production—land, labour, capital and entrepreneur.
Land and capital comes under the category of tangible factors of production. On the other
hand, labour and entrepreneur comes under the category of non-tangible factors of
production. These four categories have been discussed in detail:-

(i) Land:
The term land in economics is used in a special sense. It not only signifies the obvious
meaning of earth’s surface but is used in a broader sense. In economics, the term ‘land’ is
used to signify all the natural resources used as an input to produce various goods and
commodities. It includes all those things which are found under and over the surface of earth
and are not a result of artificial man made activities. In the words of Marshall:
"The land means the material and the forces which nature gives freely to man's aid in land
and water, in air and light and heat".

Land covers all the natural resources which are free gifts of nature. Land, therefore, includes
all gifts of nature available to mankind—both on the surface and under the surface, e.g., soil,
rivers, waters, forests, mountains, mines, deserts, seas, climate, rains, air, sun, etc.

These assets can be inexhaustible, for example, woods, or non-renewable, for example, oil or
flammable gas. The salary that asset proprietors acquire as a by-product of land assets is
called rent. Some of the features of land are:

o It is immovable in nature. The resources belonging to one place can’t be moved to

another.

o The resources are limited and they have alternative uses. For example, wood can be
used to make paper or furniture depending upon the demand of two commodities nad
profits associated with them.

(ii) Labour:
The efforts done by human who can be either mental or physical, with the aim of earning
income in terms of money or any other valuable asset is known as labour. Thus, labour can be
defined as the physical or mental effort of human being in the process of production of

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various goods and services. The reimbursement given to labourers in return for their
productive work is called wages (or compensation of employees).

Some of the features of labour are:

o Labour is perishable in nature, i.e. It can’t be stored for future purposes.

o It is inseparable. An owner cannot transfer the labour from a place to another.

o Labour is immobile as compared to capital and enterprise. If a factory changes its

location, then generally it has to find new labourers to make the production possible

o Finally, the supply of labour is quite inelastic in short run, especially in the case of
skilled labour. This is because to produce labourers we have to first train them. This
may take 20 years or more depending upon the level of skills required

The productivity of labour is an essential factor for efficient production. Productivity of the
workers can be increased by providing better wages, better working conditions, higher
standards of education and training, specialization, improving efficiency of other factors of
production and providing them with better technology and resources.

Further, labour can be divided on the basis of various factors. Some of these factors are:

o Division on the basis of skills – unskilled or skilled labour

o Division on the basis of industry – textile, mining, paper etc.

o Division on the basis of craft – Electrician, mechanic, carpenter etc.

Land is a passive factor of production as it doesn’t directly participate in the production

process. Whereas, labour is an active factor of production. Actually, it is labour which in
collaboration with land makes production of various goods and commodities possible. Land
and labour are also known as primary factors of production as their supplies are determined
more or less outside the economic system itself.

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(iii) Capital:
Capital includes all the man made goods, tools and instruments which are used for further
production of goods and commodities. Thus, it is man-made material source of production.
Alternatively, all the supports which are artificially provided for production and which are
not consumed for their own sake, are termed as capital.

It is the produced means of production, meaning that we have to first produce this input to
use it further for producing other commodities. Examples of capital are—machines, tools,
buildings, roads, bridges, raw material, trucks, factories, etc. An increase in the capital of an
economy means an increase in the productive capacity of the economy. Logically capital is
derived from land and labour and has therefore, been called as Stored-Up labour.

Some of the characteristics of capital are as follows:

o It can be created by increasing the production and reducing the consumption

relatively.

o Capitals needed to be maintained as it deteriorates with time and use. For example, a
machine needs to be lubricated in order to be used again.

o Capital helps in increasing the productivity of other factors of production. For

instance, fertilizers increase the fertility of land and tools increase the productivity of
labour.

o Capital is mobile in nature and can be shifted, to a great extent, from one place to
another.

(iv)Entrepreneur:
An entrepreneur is a person or a group of persons who organises the other factors of
production and undertakes the risks and uncertainties involved in the process of production.
He buys or hires the other three factors of production, brings them together under one roof,
organises and coordinates them so as to earn maximum profit and efficiency.

An entrepreneur is basically a boss who decides the methods of running a business. He

decides the required proportion in which the factors of production must be combined in order

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to obtain maximum profit. He decides the location of the production process and also what
type of goods or commodities to produce.

Some economist do not treat entrepreneur as a separate factor of production. They argue that
it is a special category under human labourer and thus it should be subsumed with
labour. But since, the remuneration for the work of an entrepreneur is not a fixed wage but a
residual and uncertain profit, it is more reasonable and particle to treat it as a separate factor
of production.

Some of the major functions performed by entrepreneur are as follows:

o They organise and combine various factors of production by hiring them for rent,
wage etc.

o They manage the production process by coordinating the activities of different factors.

o They bear the risk of uncertainties and losses from various market hazards.

o Also they lead to overall development of nation, by creating employment

opportunities for people.

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POTENTIAL FACTORS OF PRODUCTION
ENERGY

Energy plays an important role in the production process of various goods and services. Even
many a times, it is the determining factor for the entrepreneur while he is deciding the
location of the enterprise. The efficiency and effectiveness of varies energy sources varies
depending on their properties called energy characteristics. These energy characteristics are
determined in terms of energy grades. Energy grades indicate the levels of utility of any given
energy input. High grade energy resources lead to more economic development as compared
to low grade resources. For example, it is easier to fly a jet aircraft using jet fuel rather than
coal because jet fuel has more suitable energy characteristics and is relatively high grade.

CULTURAL HERITAGE

C.H. Douglas criticised classical economists for recognising only three factors of production
.According to him, cultural heritage was also a primary factor of production. He described
cultural inheritance as the knowledge, techniques and processes that have accrued to us
incrementally from the origins of civilization (i.e. progress). Accordingly, menfolk do not
have to keep "reinventing the wheel”. "We are merely the administrators of that cultural
inheritance, and to that extent the cultural inheritance is the property of all of us, without
exception. 2

Adam Smith, David Ricardo and Karl Marx claimed that labour adds value to the product.
Douglas accepted the fact that all costs eventually relate to labour charges of some sort (past
or present), but he denied that the present labour of the world creates all wealth. Douglas
carefully marked a distinction between between value, costs and prices. He claimed that one
of the factors resulting in a misdirection of thought in terms of the nature and function of
money was economists' near-obsession about values and their relation to prices and
incomes.3 While Douglas acknowledged "value in use" as a legitimate theory of values, he
also considered it as a subjective quantity which is not capable of being measured
objectively.

2 Douglas, C.H. (22 January 1934). "The Monopolistic Idea" address at Melbourne Town Hall, Australia.
The Australian League of Rights: Melbourne. Retrieved 28 February 2008.
3 Douglas, C.H. (1973). Social Credit (PDF). New York: Gordon Press. p. 60. ISBN 0-9501126-1-5. Archived

from the original(PDF) on 9 February 2010.

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Kropotkin did not argue that the product of a worker's labour should belong to the worker.
Instead, Kropotkin asserted the fact that every individual product is essentially the work of
everyone since every individual relies on the intellectual and physical labour of those who
came before them as well as those who built the world around them. Because of this,
Kropotkin proclaims that every human deserves an essential right to well-being because
every human contributes to the collective social product:4

Other than these, there are many other factors which some economists claim to be factors of
production. For example technological progress, Information Technology and so the list goes
on and on.

4Kropotkin, Petr Alekseevich (2015). The Conquest of Bread. Priestland, David, (This edition, using the
1913 text, first published in Penguin Classics in 2015 ed.). London: Penguin
Classics. ISBN 9780141396118. OCLC 913790063.

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EFFECTS OF FACTORS OF PRODUCION ON ECONOMY

The tenacity of economic organization5 – including all labour –is to create goods and
commodities which have economic value in the market. Economic growth happens when the
goods created are cheaper and their quantity is more. This is because, by doing so the
standard of living of people are raised. The wages of people are also increased.

Fig 1

The above figure represents two production possibility curves. The outward shift in the
production possibility curve denotes the economic growth. Thus, when the factors of
production start favouring the economy by increasing the quantity supplied of goods and
profits earned by them, then we can say that there is an outward shift in the production
possibility curve.

5Organizational economics (also referred to as economics of organization) involves the use

of economic logic and methods to understand the existence, nature, design, and performance
of organizations, especially managed ones.

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CONCLUSION
This project explained and analysed the role played by various factors of production like
land, labour, capital, and entrepreneur in production process of different goods and
commodities.

As the Greek philosopher Parmenides said, 'Nothing comes from nothing.' Factors of
production are those inputs which make it possible for us to produce finished goods and
services. We can’t produce an output without using any inputs. A service can’t be performed
without adequate labour, which in fact, is a factor of production.

From an economics perspective, every enterprise or business must have the four basic
elements or inputs to produce various goods and commodities. There are no exceptions to this
rule. Again, one may say that e-commerce break this rule as it does not require land.
However, in reality even website-only businesses require their data to be saved somewhere
on someone’s computer physically.

Also, it is not sufficient to have four factors of production, one also need to balance them. For
instance, if we employ too much labour but do not invest on land then a problem of
accommodation will arise. Similarly mere presence of plenty of entrepreneurs without
sufficient capital and investment will not result in economic growth. Each element needs to
match the demands of the other for the business to expand with profit.

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BIBLIOGRAPHY
BOOKS

• Introductory Microeconomics and Macroeconomics Class 12 CBSE by T.R. Jain and

V.K. Okhri
• N.C.E.R.T economics class XII

INTERNET SOURCES

http://www.economicsdiscussion.net/production/factors-of-production-land-labour-capital-and-
entrepreneur-national-income/541

http://www.studylecturenotes.com/management-sciences/economics/81-labor-as-factor-of-production

https://www.investopedia.com/ask/answers/040715/why-are-factors-production-important-economic-
growth.asp

Warburton, C. (1928). Economic Terminology: Factors of Production and Distributive

Shares. The American Economic Review, 18(1), 65-74. Retrieved from
http://www.jstor.org/stable/1806140

www.wikipedia.com

www.jstor.org

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