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Theory of Production

Meaning and Factors of Production

Objectives After going through this lesson, you shall be able to understand the following concepts.

• Production- Meaning

• Factors of Production and their Types

• Land and its Features

• Labour and its Features

• Capital- Features and Types

• Capital Formation and the Stages Involved

• Entrepreneur: Features and Functions

Meaning of Production Production implies creation/development of goods and services with the sole motive of selling them in the market usually to earn profit. In this regard, production is an economic activity. It must be noted that to undertake production, a producer requires some basic prerequisites (such as labour and capital) which are called inputs. The final product that is produced, using these inputs, is called output. For example, to produce motorcycles, a producer needs steel (raw materials), workers (labour), money (capital) and building and avenue (land). All these requirements, namely raw material, labour, capital and land are known as inputs or factors of production and the final product produced (motorcycle) is known as output. Another aspect of looking at is to view it as “creation of utilities”. That is, in the production process, various inputs of production are combined together to give them a new form which provides more utility. For example, production of a chair can be viewed as addition of utility to wood. Similarly, mining can be viewed as addition of utility to minerals.   In the production process, various types of utilities are created or added. These utilities can be broadly classified into the following four categories.

1. Form Utility: It refers to the utility derived from changing the physical form of natural resources. For example, making of furniture from wood, clothes from cotton, etc.

2. Place Utility: It refers to the utility derived from changing the place of the resource to a place where they can be utilised better. For example, extraction of coal and other minerals from the earth's surface and their transportation to different markets (places) where they can be used in different forms.

3. Time Utility: It refers to the utility derived from making the goods available for consumption at all times, particularly when they are not available easily. For instance, cold storage of seasonal fruits is undertaken to make them available round the year.

4. Personal Utility: It refers to the utility derived from using personal skills into production of goods or services. For instance, skills used by interior decorators, doctors and lawyers. In this regard, the following note explains the production process with respect to creation of utilities.

Factors of Production As discussed above, various inputs that are used in the production process are called factors of production. For instance, land, labour, capital and enterprise are the factors of production. In exchange of their services and contribution to the output produced, these factors are compensated by the producer. This compensation to the factors, generally in monetary terms, is called factor incomes. For example, wages given to labours and rent provided in return of using land are factor incomes. The following table shows the factors of production, their owners and their factor income.

Factor of Production Owner of Factors Factor Income Land Landlord Rent Labour Labourer Wage Capital Moneylender Interest Enterprise Entrepreneur Profit

Types of Factors of Production The factors of production can be classified into the following four categories.

• Land

• Labour

• Capital

• Entrepreneur

These factors of production can further be categorised as follows.

1. Variable factors of production: Those factors of production which can be increased or decreased as per the need to increase or reduce the units of output are called variable factors. The output is a positive function of variable factors, i.e., at zero level of output, no (zero) variable factors are employed. As we increase the employment of variable factors, the output also increases simultaneously. Labour is an example of variable factors of production.

2. Fixed factors of production: Those factors of production which remain fixed irrespective of the level of output are called fixed factors of production. These factors remains constant even at the zero level of output. For example capital such as building, plant and machinery, land are fixed factors of production. The following is a detailed description of the four factors of production.

Land In economics, land does not merely imply soil; rather, it broadly refers to all the resources that are available as nature’s gift including all the natural resources, flora and fauna, earth, building, avenues, air, water, minerals and fertility of soil. The owner of land (landlord) receives rent in exchange of his contribution to the production process. Features of Land

i. Free gift of nature: Anything that can be categorised as land is a free gift of nature. They can be neither created nor destroyed. In this regard we can say that land is freely available.

ii. Inelastic supply: The endowment or supply of land is fixed and cannot be increased or decreased. However, it must be noted that from the view point of an individual firm, the supply of land is relatively elastic. This is because from the perspective of a single firm, land is relatively in abundance. Therefore, its supply/ availability can be easily altered as per the requirement.

iii. Derived demand: The demand of land depends on the demand of other goods for the production of which it would be used. For example, the demand for agricultural land depends on the demand for food grains.

iv. Zero mobility/passive: Land cannot be moved from one place to the other. Thus, it is immobile.

v. Different uses: Land can be used for different purposes based on the efforts employed on it.

vi. Gradability: The quality of land varies from region to region. While some land are more fertile, others are not so fertile. Thus, it is possible to grade the land.

vii. Indestructible: Land is indestructible in the sense that it cannot be destroyed. Even if the fertility of soil gets depleted one can restore it.  

Labour It includes all physical and mental efforts of workers, employees and managers directed towards the production of goods and services. The services of a labourer are rendered with a motive of economic reward. A labourer receives wages in return of his services in the production process. In this regard, it must be noted that the activities done out of love, as a hobby or as a time-pass are not regarded as labour. For instance, cooking of food by a housewife is not regarded as labour. However, if the same lady cooks food and sells it in the market, then her services will be regarded as labour. Features of Labour

i. Inseparable from the labourer: For the services of labour to be rendered, the presence of labourer is a prerequisite. In this regard, labour and labourer are inseparable.

ii Perishable in nature: Labour is considered perishable in nature in the sense that the services of labour cannot be stored. For instance, if a labourer (worker) is absent for a day, that day's labour (exertion) is gone forever and cannot be brought back even through  extra work the next day.

iii. Inelastic supply: The working population of a country consists of individuals within the age group of 15 to 59 years. Therefore, at least in the short run, this pool of working population cannot be increased. As a result, supply of labour becomes inelastic.

iv. Mobility: Labour is said to be a mobile factor as it can be moved from one place to another. However, certain factors, such as family constraints, geographical location and unsuitable climatic conditions, often restrict the free flow of labour from one place to the other.

v. Heterogeneous: No two labourers possess the same set and quality of skills. In this regard, the quality of labour services also differs from one labourer to another. Thus, while some workers are

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