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 produ…