Factors of production

• Factors of production refer to those resources which are used to

produce various goods and services.
• Basically there are four factors of production. They are land, labour,
capital and organization.
LAND
Land
• In ordinary sense, land means the surface of the earth
covered by soil on which various types of human
activities are carried out.
• In economics, land includes not only the surface of
the earth covered by soil but also includes each and
every gifts of nature such as all forms of water (
oceans, seas, rivers, lake, ponds), green hills, forests,
air, sun, minerals etc.
• These resources are free gifts available to us from
nature.
land….contd

Characteristics:

• Land is free gift of nature. it is not created or produced by mankind.

• The total area of land is fixed to us, so it’s supply is perfectly inelastic.

• Land cannot be transferred from one place to another, so it is

immobile.
land….contd

• It is almost impossible to destroy the existence of land, so it is

permanent.

• Land is one of the passive or inactive factor among four factors of

production. It cannot produce any form of economic goods itself.
• Land has some Original Indestructible Powers:
• There are some original and indestructible powers of land, which a
man cannot destroy. Its fertility may be varied but it cannot be
destroyed completely.
LABOUR
Labour
• Labour is generated by active human resource.
When active human resources contribute services
to produce goods and services, it is called labour.
• In economics, human effort made without any
economic expectation cannot be called labour.

• For example, if a singer sings a song to get pleasure,

his act of singing is not his labour, but if the same
singer sings a song in a stage aiming at receiving
income, then his act of singing is called labour in
economics.
labour….contd
Characteristics
• Labour is indispensable factor because we cannot
produce any economic goods and services in the
absence of labour.

• Labour or effort that labourers can generate in a

particular period of time cannot be stored at any cost
for next time. It means labour cannot be stored. The
labour of an unemployed worker is lost forever for
that day when he does not work. It is such a factor,
which cannot be restored once it disappears. So
labour is perishable factor.
labour….contd

• The ability of the buyer to purchase goods at the

lowest price and the ability of the seller to sell his
goods at the highest possible price is called the
bargaining power. A labourer sells his labour for
wages and an employer purchases labour by paying
wages. Labourers have weak bargaining power,
because their labour cannot be stored.

• Labourers have different working efficiency, skill and

talent according to their education, experience and
training.
labour….contd

• Labourers only sell their labour i.e. their education,

experience, training, time, physical strength.

• Labour is an active factor of production because

without the effort of labour production is not
possible.
Capital
 Capital
• In general, capital refers to the various forms of money circulated by
commercial banks and other financial institutions for business
transactions.
• In economics, it refers to those resources from which some other
goods are produced such as machines, transport equipment etc.

• More specifically, capital can be the money that companies use to

buy resources, as well as the physical assets companies use when
producing goods or services, such as factories and machinery. Capital
is an important factor of production because it's what allows labor
and land to be purchased
 Characteristics
• Capital is man-made factor of production. It refers to
those resources made by mankind such as building,
vehicles, machines, plants, tools, furniture.

• Capital is one of the most mobile factors. It can be

transferred from one place to another easily because
it holds the quality of divisibility, durability and
portability.
charac….contd
• It is also one of the passive factors of production. It
can't perform any economic function without human
effort.

• It is not permanent factor. It’s value depreciates after

it is purchased or used. The wear and tear cost is one
of the parts of depreciation.

• Supply of capital is highly elastic. It can be increased

or decreased according to its demand.
charac….contd
• Capital is one of the factors to motivate hard working
because everybody aims to own more assets in the
form of land, building, vehicle, shares, bonds,
debentures etc.

• Efficient application of capital in productive business

may provide profit as well as satisfaction to the
entrepreneurs.
MCQs
• Question 1.
• In production function, production is a function of:
• (a) Price
• (b) Factors of Production
• (c) Total Expenditure
• (d) None of these
• Question 2.
• An immobile factor of production is:
(a) Capital
(b) Labour
(c) Land
(d) None of these
3. At which time all the factors of production may be changed ?
(a) Short run
(b) Long run
(c) Very Long run
(d) All the three
4. Which of the following is the source of production ?
(a) Land
(b) Labour
(c) Capital
(d) All of these
• 5. An active factor of production is:
(a) Capital
(b) Labour
(c) Land
(d) None of these
Entrepreneurship
Entrepreneurship
• Entrepreneurship is the process of discovering new ways of
combining resources. When the market value generated by this new
combination of resources is greater than the market value these
resources, the entrepreneur makes a profit.
Organization/Enterprise

• It is defined as the collective body of active human resource

established for scientific utilization of resources to produce various
goods and services.
• One who establishes an enterprise and manages the resources to
produce goods and services is called entrepreneur.
• Enterprise is responsible for organizing the other factor inputs to
promote efficiency and increase output. The reward to enterprise is
profit.
Cont.
• Business organizations have to use land, labour, capital, raw
materials, energy and technology to produce goods and services. It
pays rent, wages, interest and profit to the factors of production.
• Some types of organizations are sole proprietorship, partnership, joint
stock companies, multinational companies.
• Enterprises play a very significance role in modern economy because
they have to take risk to organize other factors of production . The
risk arises from the situation of uncertainty that will associated with
any initiative that they take.
Characteristics
• Work division :
• Division of work is the basis of an organization. Under division of
work, the entire work of business is divided into many departments.
The work of every department is further subdivided into sub works.
• Coordination:
• Under organization different human resources are assigned different
works but the aim of all these workers happen to be the same to
fulfil the specific objective of the enterprise. Hence, it helps in
establishing coordination.
• Common Objectives:
• There are various parts of an organization with different functions to
perform but all move in the direction of achieving an specific
objective.
• Machine of Management:
• Organization is considered to be a machine of management. It means
that all parts of machine should function effectively. It means, if the
division of work is not done properly or posts are not created
correctly the whole system of management collapses.
• Cooperative Relationship:
• An organization creates co-operative relationship among various
members of the enterprise. It requires at least two or more persons
because it is a system which helps in creating meaningful relationship
among individuals.
Class-room task
• What are the qualities of an entrepreneur?
• Distinguish between an entrepreneur and an organizer/ manager.