Factors of Production

What are factors of production?

Factors of production refer to 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.

Factors of production are also called agent of production.

Economic resources are the goods or services available to individuals and businesses used to produce
valuable consumer products. The classic economic resources include land, labor and capital.
Entrepreneurship is also considered an economic resource because individuals are responsible for
creating businesses and moving economic resources in the business environment. These economic
resources are also called the factors of production. The factors of production describe the function that
each resource performs in the business environment.

Some of the important factors of production are: (i) Land (ii) Labour (iii) Capital (iv)
Entrepreneur.

Whatever is used in producing a commodity is called its inputs. For example, for producing wheat, a
farmer uses inputs like soil, tractor, tools, seeds, manure, water and his own services.

All the inputs are classified into two groups—primary inputs and secondary inputs. Primary inputs
render services only whereas secondary inputs get merged in the commodity for which they are used.

In the above example, soil, tractor, tools and farmer’s services are primary inputs because they render
services only whereas seeds, manure, water and insecticides are secondary inputs because they get
merged in the commodity for which they are used. It is primary inputs which are called factors of
production.

Primary inputs are also called factor inputs and secondary inputs are known as non-factor inputs.
Alternatively, production is undertaken with the help of resources which can be categorised into natural
resources (land), human resources (labour and entrepreneur) and manufactured resources (capital).

All factors of production are traditionally classified in the following four groups:

(i) Land: It refers to all 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.

(ii) Labour: Human efforts done mentally or physically with the aim of earning income is known as
labour. Thus, labour is a physical or mental effort of human being in the process of production. The
compensation given to labourers in return for their productive work is called wages (or compensation of
employees). labour is an active factor of production. Actually, it is labour which in cooperation with
land makes production 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.

(iii) Capital: All man-made goods which are used for further production of wealth are included in
capital. Thus, it is man-made material source of production. Alternatively, all man-made aids to
production, which are not consumed/or their own sake, are termed as capital. It is the produced means
of production. Examples 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.

(iv) Entrepreneur: An entrepreneur is a person who organises the other factors and undertakes the
risks and uncertainties involved in the production. He hires the other three factors, brings them together,
organises and coordinates them so as to earn maximum profit. For example, Mr. X who takes the risk of
manufacturing television sets will be called an entrepreneur.

An entrepreneur acts as a boss and decides how the business shall run. He decides in what proportion
factors should be combined. What and where he will produce and by what method. He is loosely
identified with the owner, speculator, innovator or inventor and organiser of the business. Thus,
entrepreneur ship is a trait or quality owned by the entrepreneur.

Land:

In Economics, the word ‘land’ is used not merely in the sense of the soil or surface of the earth as is
ordinarily understood. It stands for all nature, living and lifeless. It includes all natural resources that we
can get free from air, water and land. It covers the land surface, whether level or mountainous.

 “By land is meant not merely land in the strict sense of the word, but whole of the materials and
forces which nature gives freely for man’s aid in land, water, in air and light and heat.” –Dr.
Marshall

It includes oceans, lakes and rivers, mineral deposits, rainfall, water-power, fisheries, forests and
numerous other things which nature provides and man uses. The term ‘land’ thus embraces all that
nature has created on the earth, above the earth, and below the earth’s surface.

Importance of land:

 Land as a factor of production is of immense importance. As has already been pointed out,
everything that we use can be traced ultimately to land. Land may be rightly called the original
source of all material wealth. The economic prosperity of a country is closely linked with the
richness of her natural resources.

 Generally speaking, it is true to say that a country is what nature has made it. It is possible that a
country, rich in natural resources, may remain poor (e.g., India) owing to some unfavorable
factors. But if nature has been unkind and has not given rich resources to a country, it will not be
easy to make it prosperous.

 Obviously, the quality and quantity of agricultural wealth in a country depends on the nature of
the soil, climate, and rainfall. Agricultural products, in their turn, form the very basis of trade and
industry. Industrial prosperity further depends on the presence of rich coal-mines or waterfalls
from which electricity can be generated. Localisation of industry depends on the proximity of
power and raw materials and they are largely determined by nature. The presence of cheap and
efficient means of transport is largely conditioned by the topography of a country.
  Thus, all aspects of economic life-agriculture, trade and industry—are generally influenced by
natural resources which the economists call ‘land’. Land or nature has a determining influence in
moulding the life, occupations and standard of living of a people.

Features of land:

 Land as a factor of production is quite peculiar. It possesses some important features, which
distinguish it from other factors of production. They are given below:

 Land is a free gift of nature: It is not a ‘produced’ or man-made agent. It follows, therefore,
that we have to accept it as it is. No doubt man tries to improve and modify nature. But he cannot
completely master it. A poor soil and a bad climate are great handicaps in the way of industrial
and commercial prosperity.

 Land is limited in area: Efforts have been made to reclaim land from the sea, and thus add to
the total land surface. Yet these efforts have produced only negligible results as compared with
the total area already in existence. Some land in Holland has been reclaimed from the sea, but it
is after all a small percentage of the total land surface of the world.

 Land is permanent: It is not easy to destroy it. All other factors are destructible, but land cannot
be completely destroyed. Even the havoc wrought by an atom bomb can be cured and natural
powers restored after some time.

 Land lacks mobility: Land cannot be moved bodily from one place to another. It lacks
geographical mobility. But it can be put to many alternative uses and is thus mobile from a
different point of view.

 Land is of infinite variety: Land is not man-made. Nature has so made it ‘hat different pieces of
land present infinite variations. None can say where the sandy soil ends and the clay begins. One
type shades into the other. Such minute variations are not found in any other factor of
production. Besides the situation of different pieces of land also varies.

Land as renewable & non renewable resource:

 Natural resources are classified into two categories as

1. Renewable resources

2. Non renewable resources.

• Non renewable resources: Natural resources which when used once cannot be renewed. Such as
mineral deposits of iron ore, copper, deposits of coal & petroleum.

• Renewable resources are those which go on being used again & again & year after year for
production. Such as agricultural land.
Capital:

Capital is an important factor of production. It consists of those goods which are produced by the
economic system and are used as inputs in the production of further goods and services. Capital may be
physical or tangible or intangible. Capital goods yield valuable production services over time.

Physical or Tangible Capital: The material things which are used as inputs in the production of future
goods are called tangible capital. The major categories of tangible capital office buildings, power plants,
factories, ware-houses, machines, inventories of inputs, roads, highways, etc.

Intangible Capital: Intangible capital consists of non material things that contribute to the output of
future goods and services. For example, investment by a firm in advertising to establish a brand name, or
establishing a training programme for employees to increase their still (human capital) is an input and so
included in capital.

Functions of capital:

Capital occupies an important position in determining the rate of economic development in the country.
The main functions of capital, in brief, are as under:

 (i) Capital provides equipments which help in the process of economic development.

 (ii) An increase in the stock of capital goods like machinery factories, equipments, buildings,
economic overhead capital (transport, railroad, communication, etc) and equipment for
education, health, shelter etc., enhances the growth of output per capita and consequently the
income per capital raised.

 (iii) The accumulation of capital makes the labor better equipped and delays the operation of law
of diminishing returns in agriculture and industry to a great extent.

 (iv) Capital determines the quantity and also the composition of output in the economy.

 (v) Capital puts the economy on the path to development. It results, in technological discoveries.

 (vi) The availability of capital helps in the creation of employment opportunities in the
country.

 (vii) Capital adds value to the products.

 (viii) An increase in the stock of capital once initiated feeds on itself. The process of capital
formation thus becomes interacting and cumulative.

Characteristics of capital:The following are the main characteristics of capital:

 (i) Capital is man-made. It is, therefore, possible to increase its supply when the situation
requires.

 (ii) It involves the element of time, as it renders its service over a period of time. That is why
payment for capital is calculated in terms of so much per cent per annum.
  (iii) The use of capital makes roundabout methods of production possible. Its application
increases efficiency and the productive power of all the factors with which it is combined and
used.

 Fixed Capital and Working Capital:

 Capital may be divided into fixed capital and working capital. Fixed capitals are the durable-use
producer goods which are used in production again and again till they wear out. Machinery,
tools, railways, tractors, factories, etc., are all fixed capital. Fixed capital does not mean fixed in
location.

 Working capital, on the other hand, includes the single-use producer goods like raw materials,
goods in process, and fuel. They are used up in a single act of consumption. Moreover, money
spent on them is fully recovered when goods made with them are sold in the market.

Importance of capital:

Capital plays a vital role in the modern productive system:

 (i) Essential for Production: Production without capital is hard for us even to imagine. Nature
cannot furnish goods and materials to man unless he has the tools and machinery for mining,
farming, foresting, Ashing, etc. If man had to work with his bare hands on barren soil,
productivity would be very low indeed. Even in the primitive stage, man used some tools and
implements to assist him in the work of production. But elaborate and sophisticated tools and
machines are required for modern production.

 (ii) Increases Productivity: With the growth of technology and specialization, capital has
become still more important. More goods can be produced with the aid of capital. In fact, greater
productivity of the modern economy mainly due to the extensive use of capital Capital adds
greatly to the productivity of worker and hence of the economy as a whole.

 (iii) Importance in Economic Development: Because of its strategic role in raising productivity,
capital occupies a central position in the process of economic development. In fact, capital
accumulation is the very core of economic development. Much economic development is not
possible without the making and using of capital. Broadening and deepening of capital are
mainly responsible for economic development.

 (iv) Creating Employment Opportunities:

 Another important economic role of capital is the creation of employment opportunities in the
country. Capital creates employment in two stages.

 First, when the capital is produced. Some workers have to be employed to make capital goods
like machinery, factories, dams and irrigation works.

 Secondly, more men have to be employed when capital has to be used for producing further
goods. In other words, many workers have to be engaged to produce goods with the help of
machines, factories, etc.

 Thus, we see that employment will increase as capital formation is stepped up in the economy.
  The rate of capital formation must be kept sufficiently high so that employment opportunities are
enlarged to absorb the additions to working force of the country as a result of population growth

Labor:

 Labour includes both physical and mental work undertaken for some monetary reward. In this
way, workers working in factories, services of doctors, advocates, ministers, officers and
teachers are all included in labour.

 Any physical or mental work which is not undertaken for getting income, but simply to attain
pleasure or happiness, is not labour.

 For example, the work of a gardener in the garden is called labour, because he gets income for it.
But if the same work is done by him in his home garden, it will not be called labour, as he is not
paid for that work

Characteristics of labor:

 Labour has the following peculiarities which are explained as under:

 1. Labour is Perishable: Labour is more perishable than other factors of production. It means
labour cannot be stored. The labour of an unemployed worker is lost forever for that day when he
does not work. Labour can neither be postponed nor accumulated for the next day. It will perish.
Once time is lost, it is lost forever.

 2. Labour cannot be separated from the Labourer: Land and capital can be separated from their
owner, but labour cannot he separated from a labourer. Labour and labourer are indispensable for
each other. For example, it is not possible to bring the ability of a teacher to teach in the school,
leaving the teacher at home. The labour of a teacher can work only if he himself is present in the
class. Therefore, labour and labourer cannot be separated from each other.

 3. Less Mobility of Labour: As compared to capital and other goods, labour is less mobile.
Capital can be easily transported from one place to other, but labour cannot be transported easily
from its present place to other places. A labourer is not ready to go too far off places leaving his
native place.

 4. Weak Bargaining Power of Labour: Labourers have a very weak bargaining power, because
their labour cannot be stored and they are poor, ignorant and less organised. Moreover, labour as
a class does not have reserves to fall back upon when either there is no work or the wage rate is
so low that it is not worth working. Poor labourers have to work for their subsistence. Therefore,
the labourers have a weak bargaining power as compared to the employers.

 5. Inelastic Supply of labour:The supply of labour is inelastic in a country at a particular time. It

means their supply can neither be increased nor decreased if the need demands so .The supply of
labour can be increased to a limited extent by importing labour from other countries in the short
period. The supply of labour depends upon the size of population. Population cannot be
increased or decreased quickly. Therefore, the supply of labour is inelastic to a great extent. It
cannot be increased or decreased immediately.
 6. Labourer is a Human being and not a Machine: Every labourer has his own tastes, habits
and feelings. Labourers cannot work round the clock like machines. After continuous work for a
few hours, leisure is essential for them.

 7. A Labourer sells his Labour and not Himself: A labourer sells his labour for wages and not
himself. ‘The worker sells work but he himself remains his own property’.

 8. Increase in Wages may reduce the Supply of Labour: supply of goods increases, when their
prices increase, but the supply of labourers decreases, when their wages are increased. For
example, when wages are low, all men, women and children in a labourer’s family have to work
to earn their livelihood. But when wage rates are increased, the labourer may work alone and his
wife and children may stop working. In this way, the increase in wage rates decreases the supply
of labourers. Labourers also work for less hours when they are paid more and hence again their
supply decreases.

 9. Labour is both the Beginning and the End of Production: The presence of land and capital
alone cannot make production. Production can be started only with the help of labour. It means
labour is the beginning of production. Goods are produced to satisfy human wants. When we
consume them, production comes to an end. Therefore, labour is both the beginning and the end
of production

 10. Differences in the Efficiency of Labour: Labourer differs in efficiency. Some labourers are
more efficient due to their ability, training and skill, whereas others are less efficient on account
of their illiteracy, ignorance, etc.

 11. Indirect Demand for Labour: The consumer goods like bread, vegetables, fruit, milk, etc.
have direct demand as they satisfy our wants directly. But the demand for labourers is not direct,
it is indirect. They are demanded so as to produce other goods, which satisfy our wants. So the
demand for labourers depends upon the demand for goods which they help to produce.
Therefore, the demand for labourers arises because of their productive capacity to produce other
goods.

 12. Difficult to find out the Cost of Production of Labour: We can easily calculate the cost of
production of a machine. But it is not easy to calculate the cost of production of a labourer i.e., of
an advocate, teacher, doctor, etc. If a person becomes an engineer at the age of twenty, it is
difficult to find out the total cost on his education, food, clothes, etc. Therefore, it is difficult to
calculate the cost of production of a labourer.

 13. Labour creates Capital: Capital, which is considered as a separate factor of production is, in
fact, the result of the reward for labour. Labour earns wealth by way of production. We know
that capital is that portion of wealth which is used to earn income. Therefore, capital is
formulated and accumulated by labour. It is evident that labour is more important in the process
of production than capital because capital is the result of the working of labour.

 14. Labour is an Active Factor of Production: Land and capital are considered as the passive
factors of production, because they alone cannot start the production process. Production from
land and capital starts only when a man makes efforts. Production begins with the active
participation of man. Therefore, labour is an active factor of production.
Division of labor:

 Narrow specialization of tasks within a production process so that each worker can become a
specialist in doing one thing, especially on an assembly line. In traditional industries (see sunset
industries), division of labor is a major motive force for economic-growth. However, in the era
of mass customization (which requires multiple skills and very short machine change-over time),
division of labor has become much more flexible. Also called specialization of labor.

Advantages:Some of the major advantages of division of labour are as follows:

 1. Increase in Productivity:The greatest advantage of division of labour is that it increases

immensely the productivity per worker. This point can be illustrated by the famous example of
pin making given by Adam Smith. The process of pin making is divided into 18 distinct
operations. Ten men make 48,000 pins in a day. One worker may, therefore, be considered to
have made 4,800 pins in a day. In the absence of division of labour one man could have made
only one pin in a day or at the most only 20 pins. Thus, with the division of labour the productive
capacity of the individual and of the community has greatly increased.

 2. The Right Man in the Right Place: Another great advantage is that the work under division of
labour is allotted according to the ability and capacity of the individual worker. This ensures a
high degree of efficiency as the right man is put in the right job. Thus, it eliminates the
possibility of fitting a square peg in a round hole.

 3. Dexterity and Skill: The worker becomes highly skilled and acquires high degree of dexterity
because of the repeated performance of the same operation. As the age-old dictum goes, practice
makes a man perfect. The worker acquires perfection in his skill because he has to carry out the
same operation over and over again. This adds to his productivity.

 4. Inventions are facilitated: Another significant advantage is that it promotes the development
of new ideas and better techniques of doing the work. It is due to the fact that when a worker is
performing the same operation over and over again, he can think of doing that process in a better
and improved manner. Even some mechanical device may occur to him to do that task easily and
more efficiently. Thus, division of labour results in inventions of new machinery and better tools.

 5. Saving in Time: Under division of labour, a worker performs a part of the whole process and
therefore he needs to learn only that much. Long periods of training are, therefore, rendered
unnecessary. This saves great time and money. Further as the worker remains employed on the
same process, he does not waste his time in moving from one process to another. He, therefore,
goes on working without loss of time. This further result in saving in time.

 6. Economy in the Use of Tools: A worker is not provided with a complete set of tools required
for the whole process. He is provided with only those tools which are required by him for the
performance of that part of the process which is allotted to him. Thus, one set of tools can be
made use of by many workers. This is a great economic gain.

 7. Use of Machinery Encouraged: By breaking up the production of a commodity into small and
simple operations, division of labour encourages the use of machinery and its introduction. These
simple operations easily can be carried out by suitable machines.
  Machines can be economically used only when they are fully used, that is, when their productive
capacity is fully utilised. Division of labour involves production on a large scale and therefore
permits the economical use of machinery.

 8. Cheaper Goods: Another distinct advantage of division of labour is that the economies of
large scale are reaped. The cost per unit tends to fall down when the commodity is produced on a
large scale which ensures the production of cheaper goods. Even poor people can buy them. As a
result of this, the standards of living of the people rise.

 9. Rise of Entrepreneurs: Since the work is divided into various processes, someone is required
to coordinate the work. This has resulted in the rise of entrepreneurs whose job is to specialise in
the art of organisation. The rise of entrepreneurs has greatly contributed to the increase in
efficiency and productivity of the modern economy.

What is entrepreneurship:
Many definitions of entrepreneurship can be found in the literature describing business processes. The
earliest definition of entrepreneurship, dating from the eighteenth century, used it as an economic term
describing the process of bearing the riskof buying at certain prices and selling at uncertain prices.
Other, later commentators broadened the definition to include the concept of bringing together the
factors of production. This definition led others to question whether there was any unique
entrepreneurial function or whether it was simply a form of management. Early this century, the concept
of innovation was addedto the definition of entrepreneur-ship. This innovation could be process
innovation, market innovation, product innovation, factor innovation, and even organisational
innovation. Later definitions described entrepreneurship as involving the creation of new enterprises and
that the entrepreneur is the founder.

Nowdays there is no standard definition of entrepreneur in economic theory, but are identified by three
possible elements of the entrepreneurial function:

1) The organisation of production

2)Risk
3)Innovation

 To Prepare Plan: The first and foremost function of an entrepreneur is to prepare the plan or
scheme of production i. e., the scale of production, types of goods to be produced and its
quantity.

 2. Selection of the Site: The entrepreneur makes the selection of the site for the factory to be
installed. The place should be near the market, railway station or bus-stand. The selection of the
place may be near the source of raw materials also. The selection of the place has an important
bearing on the cost of production.

 3. Provision of Capital: Capital is required to install a factory or an industry. Capital is required

at all the stages of business. It is not necessary that the entrepreneur should invest his own
capital. Therefore, he has to trace out a capitalist, to make provision for capital for the
investment. He tries to obtain capital at the lowest possible rate of interest.
 4. Provision of Land: After making provision of capital and selection of site, he has to arrange
for land. Land is either purchased or hired.

 5. Provision of Labour: In modern times, different types of labour are required to produce one
type of commodity. The entrepreneur has to make provision for labour from different places.

 6. Purchase of Machines and Tools: It is the function of the entrepreneur to purchase machines
and tools in order to start and continue the production.

 7. Provision of Raw Materials: It is the entrepreneur who makes provision for raw materials. He
purchases the best quality of raw materials at the minimum cost. He also knows the sources of
raw materials.

 8. Co-ordination of the Factors of production: One of the main functions of the entrepreneur is
to coordinate different factors of production in proper combinations, so that the cost of
production is reduced to the minimum.

 13. Search for Markets: The entrepreneur has to explore markets for his products. He produces
goods in accordance with the consumers’ tastes which can be known from market trends.

 14. Supervision: One of the main jobs of an entrepreneur is to supervise all the factors engaged
in the production process. He has to supervise every little detail so as to ensure maximum
production and economy.

 9. Division of Labour: The splitting up of production into different parts and entrusting them to
different workers is also the function of an entrepreneur. Thus, the entrepreneur decides the level
and type of division of labour.

 10. Quality of Product: Keeping in view the competition in the market, the entrepreneur has to
determine the quality of his product. He is to decide whether the goods produced should be of
superior quality only or both of superior and ordinary qualities.

 11. Sale of Goods: The responsibility of the entrepreneur is not only to produce goods but also to
sell his produce. He employs a good number of salesmen to market the goods. He makes
arrangement for publicity to push up the sales. He adopts both informative and persuasive
methods to achieve his goal.

 12. Advertisement: It is the duty of an entrepreneur to do advertisement explaining the

superiority and quality of his goods through newspapers, magazines, radio, TV, etc.
Advertisement is done to create and increase the demand or sale of his goods

 15. Contact with the Government: The entrepreneur has to make contacts with the government
because the modern production system is controlled by the government in several ways. A
licence is taken before the start of production. The entrepreneur has to abide by certain rules and
regulations of production and has to pay taxes regularly.

 16. Payment to Factors of Production: The rewards of the various factors of production have to
be decided by the entrepreneur. He makes payments to the landlord, labour and capitalist in the
 form of rent, wages and interest. Since payments to these factors of production constitute cost, so
no entrepreneur wants to pay to a factor more than its productivity.

 17. Quantity of Production: The entrepreneur determines the quantity of production keeping in
view the demand for goods and the extent of market. How much goods are to be produced is the
main decision taken by the entrepreneur.

 18. Risk-Taking: Risk-taking is the most important function of an entrepreneur. He has to pay to
all the other factors of production in advance. There are chances that he may be rewarded with a
handsome profit or he may suffer a heavy loss. Therefore, the risk-bearing is the final
responsibility of an entrepreneur.

 19. Innovation: Innovation plays an important role in modern business. The entrepreneur makes
arrangements for introducing innovations which help in increasing production on the one hand,
and reducing costs, on the other. Innovations may take the form of the introduction of new
methods in the process of production or introducing improvements in the existing methods. It
also includes discovery of new markets, raw materials and new techniques of production.