CHAPTER 4

MEANING OF PRODUCTION AND FACTORS OF PRODUCTION

SYNOPSIS
 Nature of production and types of production?
 Factors of production.(land, labor, capital and entrepreneurship)
 Characteristics of each factor of production.

I. NATURE OF PRODUCTION AND TYPES OF PRODUCTION.

i) NATURE OF PRODUCTION.
 Production implies the making of a commodity or the supplying of a
service.
 It is very different form creation.
 As the saying goes “God creates but man produces”
 Creation implies the production of something out of nothing.
 Production on the other hand refers to the making of a commodity or
service out of something else.
 EG: Man takes out coal from the earth; the extraction of coal is
production. Man does not produce the coal as nature as produced it. A carpenter
produces a chair or a table from wood; but he does not make wood which is actually a
product of nature.
ii) TYPES OF PRODUCTION
 Production as cultivation: Production may take the form of cultivation.
E.g.: the farmer plows, sows, irrigates, weeds and finally as the end harvests his crop
say wheat.
 Production as extraction: Production may also take the form of taking out
certain goods which are already made by nature. E.g.: The coal from the earth and
fish from the sea.
 Production as manufacturing: Production may take the form of changing
one commodity into another. E.g.: the production of a table from wood.
 Production as distribution: Production takes place when a commodity is
stored over time or when it is shifted from one place to another till it reaches the
consumer.

II. FACTORS OF PRODUCTION

 Factors or agents of production refer to those goods or services without which

production is not possible.
 E.g.: paper, printing press, labor, land, bullocks, plough, seeds, tools etc are all
factors of production.
  They are called factors of production because they help in the production of
goods.
 Generally we speak of four main factors namely: Land, labor, capital and
entrepreneurship.

i.) Land.
 Ordinarily when we speak of land, we refer to the space upon which we
build our homes, farms and factories.
 In economics we speak of land as a factor of production and hence we
refer to not only the soil but all the natural resources which we find on the ground,
beneath the ground in the water and in the air.
 Land therefore refers to al natural resources- the materials and the forces
which nature gives freely for aid in land and water, in air, light and heat.
 Natural resources may be defined as all those gifts of nature which man
uses to produce goods and services which satisfy his wants.
 Land refers to the sea, lakes, river valleys, mountains plains etc. on which
depends the prosperity and wealth of the country.
 Thus natural resources or land constitute an important factor production.
 A country which is blessed with plenty of natural resources can become
rich and prosperous.
 However one must realize that resources are useless unless man is
prepared to use them and has the necessary knowledge and ability to use them.

 The following are the characteristics of Land:

a) Land is a free gift of nature

 It is not a produced or man-mad agent.
 It follows therefore that we have to accept it as it is.
 No doubt that man tries sot improve and modify nature but he cannot
comp[lately master it.
 A poor soil and a bad climate are great handicaps in the way of industrial
and commercial prosperity.

b) Land is limited in area

 Efforts have been made to reclaim land from eh sea, and thus add to the
total land surface.
 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.

c) Land is not perishable/It is permanent.
 It is not easy to destroy it. Al other factors are destructible but land cannot
be completely destroyed.
  Even the havoc caused by a drought, by an atom bomb etc can be cured
and natural powers restored after some time.

d) 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
ans is thus mobiles from a different point of view.
e) Land is of infinite variety/ Land varies in quality.
 Land is not man-made. Nature has so made it that different pieces of land
present, infinite variations.
 None can say where the sandy soil ends and the clay begins.
 One type shades into another.
 Such minute variations are not found in any other factor of production.
 Besides the situation of different pieces of land also varies.

f) Land differs in location

 Land differs in the matter of location.
 Land in large cities like Delhi, Bombay and Calcutta is extremely scarce
and hence commands a high value.
 E.g.: Land located in a river valley is likely to be more productive and
richer than land located on a mountain slope.

ii.) Labor
 In ordinary language, labor refers to the work done manually or it refer to
the workers who use their hands and feet.
 In economics the term labor refers to “ the inclusion of all efforts made by
mad to earn a living”
 If a person uses his energy and exerts his mind and body with the motive
of getting an income, he is engaged in labor.
 Hence labor is defined as

“any effort physical or mental made to earn a living”

 The following are the characteristics of Labor:

a. The worker and his services go together.

 Labor is clearly different from all other factors of production.
 The worker embodies the service which he performs. He is not distinct
and separate from his own service.
 On the other hand, all other suppliers of factories are distance and separate
from the factors which they supply.
 E.g: the capitalist is different from the land which he owns but the worker
and his services go together.
 b. The worker sells only his services.
 Whatever has been spent on laborers training cannot be recovered by selling his
labor.
 That might have been possible when slave trade used to flourish.
 But those days are long gone and now investment in the laborer becomes a part
and parcel of him.

c. Labor is perishable.
 If time flies, the laborer also fliers with it.
 A day lost without work means a days work gone for ever.
 That is why workers are compelled to accept even low wages rather than earn
nothing.

d. The worker cannot separate himself from the services.

 A farmer who produces cotton may send his produce to a nearby market or to a
distant market but he himself need not go to the market.
 The textile mill which produces cloth may sell within the country or elsewhere
but neither the mill not its representative need go to all the markets where the cloth is
sold.
 This is the case with all factors.
 But in the case of labor, the worker has to present himself and offer his services
personally.
 This is so because the laborers services and the laborer himself are inseparable.

e. Wages alone do not influence labor

 Because of the personal nature of labour service, wages alone are not significant.
 Other considerations such as the number of hours worked,
the relative security of working conditions, pensions, vacations etc are equally
important in influencing people to come for work.

f. Supply of labor is peculiar.

 Generally the supply of a commodity changes directly with price; the higher the
price the higher its supply and lower the price, the smaller the quantity supplied.
 In the case of supply of labour, however the position is different.
 If wages rise the supply of labour may contract and if wages fall the supply of
labour may increase.

g. Supply of labor changes slowly.

 If there is more demand for cloth, the manufactures will produce more and sell
more.
 On the other hand if demand for cloth declines, the manufacturers will cut down
their production of cloth.
 In other words production and supply of goods are adjusted according to demand.
  This is not so in the case of labour.
 If the demand for labor in general increases and if the number of workers is small
in the country, it will take a long time say 20 to 30 years to increase the number.
 Suppose the demand for a particular type of labor is increased, say that of
engineers and doctors , it would take some years to produce and train the workers in
such tasks.
 Thus the supply of labour changes slowly.

h. Labor is mobile but labor mobility is low.

 Labor is much less mobile than capital and other goods.
 This follows from the fact that a laborer is not a machine.
 He does not want to leave his heart, his home or his children
 A few other minor characteristics are- Man is not a machine, Difficulty of
calculating cost of production, Labour differ in efficiency and laborer do not have
the same power of bargaining as their employers.

iii.) Capital
 Generally when we speak of capital we refer to it as money but in
economics the term capital is used in a much wider sense.
 It refers to all man made goods which are used in production.
 They are also known as producer’s goods or capital goods.
 Capital includes tools, equipments, machinery, buildings, transport
equipment, raw materials etc.
 All these goods are regarded as wealth but they will be capital provided
that they are used in production.
 Thus capital is wealth but wealth is not capital.

 The are two types of capital that we speak of:-

a. Constant or Fixed Capital
b. Variable or Circulating Capital

a. Constant or Fixed Capital

 It refers to the initial investment in installed capacity that is investment in
buildings, machines, tools etc.
 The fixed cost of a firm remains fixed irrespective of level of output
production, whether the firm produces of units of output or infinite units of output,
the fixed cost remains the same.
 b. Variable or Circulating Capital
 Variable cost is that cost which varies with the level of output.
 Lesser the production, lower the variable cost and larger the production higher the
variable cost.
 Variable cost examples: raw material costs, taxes etc.

 The following are the characteristics of capital are:

a. Capital is man-made- it is not a gift of nature.

 Capital is generally defined as that part of wealth which is used in the
further production of wealth.
 It consists of all types of tools, implements, machinery, buildings, raw
materials etc.
 Hence capital is man-made.
b. Capital is not fixed in quantity and can be increased and decreased.
 Capital Depreciation
 Capital Formation
 Meaning: Capital formation means increasing the stock of real capital in a
country. In other words, capital formation involves the making of more capital goods
such as machines, tools, factories, transport equipment, materials, electricity, etc
which are all used for further production of goods. For making additions to the stock
of capital, savings and investment are essential.
 There are three steps in capital formation:
i. Restructure in consumption and increase in savings.
ii. The existence of banks and financial institutes to mobilize the savings of the general
public and enable them to invest it.
iii. The existence of enterprise or investment opportunities.
c. Capital is perishable
 Capital of every type has a limited life or limited life-span
 Over a period of time capital equipment will be deprecate and becomes useless or
breaks down.
 Thus capital can be destroyed or it is perishable.
d. Capital is mobile
 Readiness of capital to move from one place to another or one country to another.
 The possibility of pitting any capital equipment to alternative uses.
 Mobility of capital is influenced or determined by the rate of interest.
 Capital moves from low interest places, areas occupation, uses to high interest.
 So the rate of interest in the main cause of capital mobility.
 e. Capital in each group is identical or homogeneous.
 Capital in each group is identical or homogeneous.
 E.g: In a factory, where sowing machines are produced each sowing machine is
exactly the same or identical in all respects.

iv.) Entrepreneurship.
 In the past production was carried on in the house of workers or in small
workshops.
 The worker in olden times himself possessed the tools he required
supplied the capital he wanted, owned his own land or house, and planned the
operation himself.
 He was the landlord, the worker, the capitalist and the organizer al rolled
in one.
 But conditions of production and market have changed considerable these
days. Production is no more simple.
 It is organized on a large scale and had become highly complex.
 Besides factors of production are owned separately and sometime may
even lie scattered.
 A cotton textile mill in Coimbatore engages over 5000 workers who come
from all over Tamil Naidu and Kerela, Its capital is supplied by shareholders, spread
over the whole of India but also in other countries.

 It becomes, necessary therefore for someone to bring all the factors of

production together, co-ordinate them, supervise and manage them.
 Such a person, or often a group of persons known as the organizer or the
enterpriser of entrepreneur.
 “Entrepreneur” is a French Word which is now commonly used by
economists to refer to the person or persons who perform the task of organizing and
managing a business.

 The functions of an entrepreneur are therefore:

a. He decides about what he will produce, where he will produce and
how he will produce it.
b. He co0ordiantes the work of the different factors of production.
c. He anticipates the future demand and future prices.
d. He introduces a new idea or a new commodity, a new process or
some new machinery.
e. He busy raw material and sells the finished goods.
f. He represents the business before the government or with other
enterprises.

 Conclusion
 In short he is the one who must take all the decisions
regarding the organization running and management of the firm.
 In performing these functions the organizer assumes many
risks and bears a heavy responsibility.
 The entrepreneur is not a paid manager. He is the one who
acts as boss and who decides as to how the business should be run; he is not paid any
fixed wages. \
 The entrepreneur himself is not employed by anyone and is
not paid a fixed salary.