Micro Economics
Chapter # 5
Factors of Production
Production
Production in economics is generally
understand as the transformation of
inputs into out puts.
Inputs are what a firm buys
(Resources)
Outputs are what a firm sells (goods)
In other words production means
creation of wants satisfying
goods/services.
Factors of Production
Productive resources required to produce a
given product are called factors of
production.
These productive resources may be raw
materials or capital etc etc.
Factors of Production:
Land
Labour
Capital
Organization or entrepreneur
Land
Land doesn't mean soil as in the
ordinary speech, but it is used in a
much wider sense.
In the words of Marshall land means “
the materials & the forces which
nature gives freely for man’s aid, in
land and water, in air and light and
heat”.
Land stands for all natural resources
which yield an income.
Characteristics of land
Land is nature’s gift to man
Land is fixed in quantity
Land is permanent (indestructible)
Land lacks mobility in the
geographical sense
LABOUR
In the ordinary speech, the term
labour means a mass of unskilled
labour.
But in economics it is used in a wider
sense.
“ Any work whether manual or
mental which is undertaken for a
monetary consideration “ is called
Division of Labour
Simple division of Labour:
This means division of society into major
occupations, e.g, carpenters/mason etc
Territorial division of Labour:
This form of division of labour refers to
certain localicities,cities/towns specializing in
the production of some commodity. For
example, localization of industries in a
certain place or region.
Advantages of Labour
Increase in productivity
Increase in experty & skill
Inventions are facilitated
Introduction of machinery facilitated
Save in time
Diversity of Employment
Disadvantages of Labour
Loss of skills
Risk of unemployment
Effecting human development
CAPITAL
Capital refers to that part of man’s wealth
which is used in producing further wealth or
which yields an income.
The amount with which a person start a
business for earning profit.
Is land capital ? Land is not a capital
because :
Land is free gift of nature
Land is indestructible
Land is not movable
Importance of Capital
Capital plays an important role in
production because :
Production without capital is impossible
Finished goods needs tools & machinery
Creation of employment opportunities
Economic development
Capital Formation
Capital formation means the increase
in the stock of real capital in a
country/org.
Capital formation involves making of
more capital goods such as
machines, tools,factories,transport
equipment, materials,electricity etc
which are all used for further
production of goods.
Enterprise
The fourth factor of production is
enterprise which is supplied by the
entrepreneur.
Entrepreneur is the innovator,
innovation by the entrepreneur
implies a variety of things.
It may mean the introduction of a
new method of production or an
improvement in the old method.