Posted by: Gaurav Akrani (http://kalyan-city.blogspot.com)
What is production?
Factors of production means inputs and finished goods means output. Input decides the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called as "Production Function".
All factors of production like land, labour, capital and entrepreneur are required altogether at a time to produce a commodity. In economics, production means creation or an addition of utility.
Factors of production refers to inputs required for conducting production. Input is the starting point of every production activity.
According to Prof. Benham, "Anything that contributes towards output is a factor of production."
Mere existence of anything doesn't make it a factor of production but its contribution in production process is a necessary condition. Dr. Alfred Marshall described factors of production as "Agents of Production". Cooperation among factors is essential to produce anything because production is not a job of single factor.
All factors of production like land, labour, capital and entrepreneur are required altogether at a time to produce a commodity. In economics, production means creation or an addition of utility.
Factors of production refers to inputs required for conducting production. Input is the starting point of every production activity.
According to Prof. Benham, "Anything that contributes towards output is a factor of production."
Mere existence of anything doesn't make it a factor of production but its contribution in production process is a necessary condition. Dr. Alfred Marshall described factors of production as "Agents of Production". Cooperation among factors is essential to produce anything because production is not a job of single factor.
Land is a Natural & Primary Factor of Production
Land is not created by mankind but it is a gift of nature. So, it is called as natural factor of production. 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.
It includes following natural resources :-
It includes following natural resources :-
- On the surface (e.g. soil, agricultural land, etc.)
- Below the surface (e.g. mineral resources, rocks, ground water, etc.)
- Above the surface (e.g. climate, rain, space monitoring, etc.)
- Land is a free gift of nature to mankind. It is not a man-made factor but is a natural factor.
- Though all factors are required for production, land puts foundation for production process. Starting point of production process is an acquisition of land. So, it is a primary factor.
- From society's point of view, supply of land is perfectly inelastic i.e. fixed in quantity. Neither it can be increased nor decreased. Simply, you can not change size of the earth. But from individual point of view, its supply is relatively elastic.
- 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 gradability.
- Land itself doesn't produce anything alone. It is a passive factor. It needs help of Labour, Capital, Entrepreneur, etc. Like labour and entrepreneur, it doesn't work on its own initiative. So it is a passive factor.
- Here, return means quantity of crops. By using fertility of land with the help of capital and labour continuously, returns gets diminished because of reduction in fertility.
- Demand for agricultural goods is a direct demand and for producing such goods, land is indirectly demanded. So, as a factor, land has a derived demand from consumer's point of view.
- 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.
- 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.
- 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.
- 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.
- Rent is a reward for the use of land. Classical economists like Ricardo connected rent with fertility of land whereas modern economists like Marshall and Javons stated that land earns rent because of its scarcity.
Meaning and features of labor
Usually, the term 'Labor' is used for 'worker'. But, technically, it is not correct. Labor and Laborer (worker) are two different things.
Labor is an ability to work. Labor is a broad concept because it includes both physical and mental labor. Labor is a primary or human factor of production. It indicates human resource.
Laborer is a person who owns labour. So laborer means worker. It is a person engaged in some work.
Labor is an ability to work. Labor is a broad concept because it includes both physical and mental labor. Labor is a primary or human factor of production. It indicates human resource.
Laborer is a person who owns labour. So laborer means worker. It is a person engaged in some work.
- Labor can not be separated from labourer. Worker sells their service and doesn't sell themselves.
- Labor can not be stored. Once the labor is lost, it can not be made up. Unemployed workers can not store their labor for future employment.
- It is easy to calculate production cost of a commodity produced in an industry. But cost of producing a labor is a vague concept because it includes expenses incurred by parents on education of their children and other expenses incurred on them right from their birth date. It is impossible to estimate all such casts accurately.
- Other factors like land, capital are passive, but labor is an active factor of production. Being a human being, this factor has its own feelings, likes and dislikes, thinking power, etc. We can achieve better quality and level of production, if land and capital are employed properly in close association with Labor. So without labor, we cannot imagine the smooth conduct of production.
- No two persons possess the same quality of labor. Skills and efficiency differs from person to person. So, some workers are more efficient than others in the same job.
- Labor 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.
- Supply of labor depends upon many factors like size of population, age and sex composition, desire to work, quality of education, attitude towards work, etc. Thus, supply cannot be changed easily according to changes in demand. Hence, in general, labour supply is inelastic. But for a particular industry, it may be relatively elastic.
- Society makes investment in labor in the forms of education, health, training, etc. This improves efficiency of labour. So, it is a human capital.
- Workers collectively form their organization which is known as trade union. With this, they bargain with their employers and there by secure higher wages and better working conditions. Such trade unionism is not possible in other factors of production like land, else works only in case of labor (laborer).
- Like other factors of production, labor has a derived / indirect demand. It contributes to production process.
- Labor is a mean of production in factory. But outside the factory premises worker may be a consumer of that product. So, he might be an end user of that commodity.
Meaning and features of capital
Different subjects like Book-keeping, organization of commerce (O.C) and secretarial practice (S.P) in commerce, economics, etc., indicate different meaning of the term Capital.
In book-keeping, capital means amount invested by businessman in the business.
In commerce subjects like O.C and S.P, capital means finance or company's capital.
But, in economics, capital is that part of wealth which is used for production.
But here consider meaning of term capital from economic point of view.
The word Capital is related with the following three terms:
In book-keeping, capital means amount invested by businessman in the business.
In commerce subjects like O.C and S.P, capital means finance or company's capital.
But, in economics, capital is that part of wealth which is used for production.
But here consider meaning of term capital from economic point of view.
The word Capital is related with the following three terms:
- Wealth,
- Money, and
- Income.
- Capital is that part of wealth which is used for production. So, wealth is a broad concept and capital is a narrowed concept.
- 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 a ice-cream parlour owner. But, profits which he gets out of his business is his income.
- The characteristics or features of capital are:
- Man-made Factor : Capital is not a gift of nature. So it is not a primary or natural factor, it is made by man in capital goods industry. It is secondary as well as an artificial factor of production.
- Productive Factor : Capital helps in increasing level of productivity and speed of production.
- Elastic Supply : Supply of capital depends upon capital formation process. Capital formation depends upon savings and investment. By accelerating capital formation, capital supply can be increased. But it is a long term process.
- Durable : Capital is not perishable like labour. It has a long life subject to periodical depreciation.
- Easy Mobility : Movement of capital from one place to another is easily possible.
- Is a Wealth : Since capital has all features of wealth viz. utility, scarcity, transferability and externality, capital is a wealth but wealth doesn't necessarily become capital.
- Derived demand : As a factor of production, 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.
- Round about production : Capital goods doesn't satisfy our wants directly. But resources should be diverted towards production of capital goods first. And thereafter such produced mean can be used to produce consumer goods having direct demand.
- Social Cost : Resources have alternative uses. Either they can be put to production of capital goods or consumer goods. When resources are used for producing capital goods, it means society has sacrificed enjoyment of consumer goods. This is called social cost.
- The forms, classification or types of capital are:-
- Fixed capital : It refers to durable capital goods which are used in production again and again till they wear out. Machinery, tools, means of transport, factory building, etc are fixed capital. Fixed capital does not mean fixed in location. Since the money invested in such capital goods is fixed for a long period, it is called Fixed Capital.
- Working capital : Working capital or variable capital is referred to the single use produced goods like raw materials. They are used directly and only once in production. They get converted into finished goods. Money spend on them is fully recovered when goods made out of them are sold in the market.
- Circulating capital : It is referred to the money capital used in purchasing raw materials. Usually the term working capital and circulating capital are used synonymously.
- Sunk capital : Capital goods which have only a specific use in producing a particular commodity are called Sunk capital. E.g. A textile weaving machine can be used only in textile mill. It cannot be used elsewhere. It is sunk capital.
- Floating capital : Capital goods which are capable of having some alternative uses are called floating capital. For e.g. electricity, fuel, transport vehicles, etc are the floating capital which can be used anywhere.
- Money capital : Money capital means the money funds available with the enterprise for purchasing various types of capital goods, raw material or for construction of factory building, etc. it is also called liquid capital. At the beginning the money capital is required for two purposes one for acquiring fixed assets i.e. fixed capital goods and another for purchasing raw materials, payment of wages and meeting certain current expenses i.e. working capital.
- Real capital : On the other hand, real capital is referred to the capital goods other than money such as machinery, factory buildings, semi-finished goods, raw materials, transport equipments, etc.
- Private capital : All the physical assets (other than land), as well as investments, which bring income to an individual are called private capital.
- Social capital : All the assets owned by a community as a whole in the form of non-commercial assets are called social capital e.g. roads, public parks, hospitals, etc.
- National capital : Capital owned by the whole nation is called national capital. It comprises private as well as public capital. National capital is that part of national wealth which is employed in the reproduction of additional wealth.
- International capital : Assets owned by international organizations like UN, WTO, World Bank, etc., constitutes an International Capital.
What is Entrepreneur?
The term 'Entrepreneur' has been derived from a French word 'Entreprendre' meaning to undertake certain activities. Normally, entrepreneur has to perform two types of functions. 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. 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.
To be a successful and ideal entrepreneur, one should have certain qualities or skills as given below :
To be a successful and ideal entrepreneur, one should have certain qualities or skills as given below :
- Ability to organize : He should be able to organize various factors effectively. He has to understand all the aspects of the business.
- Professional approach : He should be objective and professional in approach.
- Risk bearer : He should be risk taker. He should be ready to bear risk and uncertainties.
- Innovative : Organiser should be innovative. He should adopt modern techniques of production. He should not be reluctant to changes.
- 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.
- Negotiation skills : Businessman regularly comes into contact with various persons like consumers, workers, government officials, etc. so he should communicate tactfully.