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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.
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.
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.
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.
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:
3. Cost of labour:
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.
8. Human capital:
ii.
iii.
iv.
v.
vi.
vii.
viii.
Social and political Factors: Factors like the fear to be removed from
employment and social security schemes also affect the efficiency.
Capital
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:
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.
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.