Human activity can be broken down into two components, production and consumption. When there is production, a process of transformation takes place. Inputs are converted into an output. The inputs are classified and referred to as land, labour, and capital. Collectively the inputs are called factors of production.
When the factors of production are combined in order to produce something, a fourth factor is required. Goods and services do not produce themselves but need some conscious thought process in order to plan and implement manufacture. This thought process is often called entrepreneurship or organisation.
Factors of production refer to those goods and services which help in the productive process.
Factors of production are broadly classified into primary factors and derived factors. Man (Labour) acts upon Nature (Land) to produce goods and services and wealth. These two factors (Land and Labour) are naturally given and without them no goods can be produced. These are called primary factors.
Capital and organisation are derived from the primary factors of production, and are called derived factors of production. These derived factors of production, when combined with the primary factors of production, raise total production.
According to the traditional classification, there are four factors of production. They are Land, Labour, Capital and Organisation.
Land as a factor of production refers to all those natural resources or gifts of nature which are provided free to man. It includes within itself several things such as land surface, air, water, minerals, forests, rivers, lakes, seas, mountains, climate and weather. Thus, 'Land' includes all things that are not made by man.
1. Land is a free gift of nature
2. Land is fixed (inelastic) in supply.
3. Land is imperishable
4. Land is immobile
5. Land differs in fertility and situation
6. Land is a passive factor of production
As a gift of nature, the initial supply price of land is zero. However, when used in production, it becomes scarce. Therefore, it fetches a price, accordingly.
Labour is the human input into the production process. Alferd Marshall defines labour as 'the use or exertion of body or mind, partly or wholly, with a view to secure an income apart from the pleasure derived from the work'.
1. Labour is perishable.
2. Labour is an active factor of production. Neither land nor capital can yield much without labour.
3. Labour is not homogeneous. Skill and dexterity vary from person to person.
4. Labour cannot be separated from the labourer.
5. Labour is mobile. Man moves from one place to another from a low paid occupation to a high paid occupation.
6. Individual labour has only limited bargaining power. He cannot fight with his employer for a rise in wages or improvement in work-place conditions. However, when workers combine to form trade unions, the bargaining power of labour increases.
Labour can assume several forms. Digging earth, breaking stones, carrying loads comprise simple labour operations but labour also covers highly qualified and skilled managers, engineers and technicians.
The concept 'Division of Labour' was introduced by Adam Smith in his book 'An Enquiry into The Nature and Causes of Wealth of Nations'.
Division of Labour means dividing the process of production into distinct and several component processes and assigning each component in the hands of a labour or a set of labourers, who are specialists in that particular process.
For example, a tailor stitches a shirt in full. In the case of garment exporters, cutting of cloth, stitching of hands, body, collars, holes for buttons, stitching of buttons, etc., are done independently by different workers. Therefore, they are combining the parts into a whole shirt.
A tailor may stitch a maximum of four shirts a day. In the case of garment exports firm, it may stitch more than 100 shirts a day. Thus, division of labour results in increased production.
It is stated 'Division of Labour is limited by the extent of market'. When markets for a commodity grows from local to national and national to international, producers of that commodity divide and subdivide the processes of its production into finer and finer divisions of labour. Each sub-division is assigned to a particular set of specialist workers. As a result, production rises enormously.
1. Division of labour improves efficiency of labour when labour repeats doing the same tasks.
2. Facilitates the use of machinery in production, resulting in inventions. e.g. More's telegraphic codes.
3. Time and materials are put to the best and most efficient use.
The demerits of Division of Labour are:
1. Repetition of the same task makes labour to feel that the work is monotonous and stale. It kills the humanity in him.
2. Narrow specialisation reduces the possibility of labour to find alternative avenues of employment. This results in increased unemployment.
3. Kills the growth of handicrafts and the worker loses the satisfaction of having made a commodity in full.
Capital is the man made physical goods used to produce other goods and services. In the ordinary language, capital means money. In Economics, capital refers to that part of man-made wealth which is used for the further production of wealth. According to Marshall, 'Capital consists of those kinds of wealth other than free gifts of nature, which yield income'.
Money is regarded as capital because it can be used to buy raw materials, tools, implements and machinery for production. The terms capital and wealth are not synonymous. Capital is that part of wealth which is used for the further production of wealth. Thus, all wealth is not capital but all capital is wealth.
1. Physical Capital or Material Resources
2. Money Capital or Monetary Resources, and
3. Human Capital or Human Resources
1. Physical Capital
All man-made physical assets like plant and machinery, tools, buildings, roads, dams and communication, etc., are the various forms of physical capital.
1. It is an asset which has a specific life period.
2. Physical capital asset can be used in production again and again. As a result, it undergoes wear and tear or depreciation.
3. When used in production, it gives a series of annual income flows called annuities, during its life period.
Accumulation of more and more physical capital is called physical capital formation
2. Money Capital
The investment that is made in the form of money or monetary instruments is called money capital. A household saves its income in the form of bank deposits, shares and securities or other monetary instruments. These are the sources of money capital.
3. Human Capital
Human capital refers to the quality of labour resources, which can be improved through investments in education, training, and health. Higher the investments in human capital, higher will be the productivity.
1. Capital is a passive factor of production
2. Capital is man-made
1. Capital is not an indispensable factor of production, i.e. Production is possible even without capital
2. Capital has the highest mobility
3. Supply of capital is elastic
4. Capital is productive
5. Capital lasts over time (A plant may be in operation for a number of years)
6. Capital involves present sacrifice (cost) to get future benefits.
An entrepreneur is a person who combines the different factors of production (land, labour and capital), in the right proportion and initiates the process of production and also bears the risk involved in it. The entrepreneur is also called 'organiser'. Entrepreneurship is risk taking, managerial, and organizational skills needed to produce goods and services in order to gain a profit. In modern times, an entrepreneur is called 'the changing agent of the society'. He is not only responsible for producing the socially desirable output but also to increase the social welfare.
1. Identifying Profitable Investible Opportunities
Conceiving a new and most promising and profitable idea or capturing a new idea available in the market is the foremost function of an entrepreneur. This is known as identifying profitable investible opportunities.
2. Deciding the size of unit of production
An entrepreneur has to decide the size of the unit - whether big or small depending upon the nature of the product and the level of competition in the market.
3. Deciding the location of the production unit
A rational entrepreneur will always locate his unit of production nearer to both factor market and the end-use market. This is to be done in order to bring down the delay in production and distribution of products and to reduce the storage and transportation cost.