1. Lecture 5
Factors of Production

2. What is Production?
• Production is sometimes defined as
– The creation of want-satisfying goods and services
– But this is not a scientifically correct definition as
to produce as thing which has utility but not value
is not production in economic sense
• Production therefore, should be defined as
– Creation or addition of value
• Production essentially means transformation
of one set of goods into another

3. Factors of Production
• Productive resources required to produce a given
product are called factors of production
• These productive resources may be raw materials or
services of the various categories of workers or of
entrepreneurs (assembling the factors and organizing
the work of production)
• The factors of production are traditionally classified as
Land, Labour, Capital and Organization (or Enterprise)
– These factors are complementary in the sense that their
cooperation or combination is essential in production
process

4. Land
• The term ‘land’ has special meaning in
Economics
– It does not mean soil a in the ordinary speech
– According to Marshall, land means
• The materials and forces which nature gives freely for
man’s aid
• Land stands for all natural resources which yield an
income or which have exchange value

5. Peculiarities of Land
• Land is nature’s gift to man
• Land is fixed in quantity
• Land is permanent
• Land lacks mobility in geographical sense
• Land provides infinite variation
– No two pieces of land are exactly alike

6. Labour
• In ordinary speech the term labour means
– Mass of unskilled labour
• In Economics it is used in a wider sense
– Any work, whether manual or mental, which is undertaken
for a monetary consideration is called labour
– Any work done for the sake of pleasure or love does not
fall under the labour in the economics sense
• In Marshalls’s words
– Any exertion of mind or body undergone partly or wholly
with a view to some good other than the pleasure derived
directly from the work, is called labour

7. Peculiarities of Labour
• There are certain characteristics which distinguish
labour from rest of factors of production
– Labour is inseparable from the labourer himself
– Labour has to sell his labour in person
– Labour does not last. It is perishable
– Labour has a very weak bargaining power
– Changes in the price of labour react rather curiously
on its supply
• With decrease in wage rate supply of labour increase as
more family members start working
– There can be no rapid adjustment of the supply of
labour to demand for it
• Supply cannot be increased quickly nor can it be reduced

8. Efficiency of Labour
• Following are the some factors which affect labour efficiency
– Racial qualities
• Labour efficiency largely depends on heredity and the racial stock to which a
worker belongs
– Climatic factors
• A cool bracing climate is conductive to hard work, whereas the tropical climate
is everlasting
– Education
• Efficiency depends on education, both general and technical
– Industrial organization and equipment
• The level of organization and the nature of equipment supplied to the
workers, too, determine their efficiency
– Factory environments
• Cramped and illventtilated factories, situated in crowded and insanitary
surroundings, are not conducive to efficiency
– Working hours
• Long hours impair labour efficiency
– Fair and prompt payment
• A well-paid worker is generally contented and puts his heart into the job
– Organization
• An organized effort is always more effective
– Social and political factors
• Social security schemes guaranteeing from freedom and fear

9. Division of Labour
• Simple Division of Labour
– This means dividing society into major occupations e.g.
carpenters, black smiths etc
– This is also called functional division of labour
• Complex Division of Labour
– In this case, no group of workers makes complete article
– The making of article is split into processes and sub-
processes
– Each group carried out separate process or sub-process
– This division is called complex division of labour
• Territorial Division of Labour
– This form of division refers to certain localities

10. Advantages of Division of labour
• Increase in productivity
– Division of labour increases productivity
– E.g pin making
• 18 distinct operations
• Increase in dexterity and skill
– Practice makes the man perfect
• Inventions are facilitated
– New inventions
• Introduction of machinery facilitated
– New machines can be invented
• Saving in time
– One process per worker so saving in time
• Saving in tools and implements
– Different tools to different workers so tools saving
• Diversity of employment
• Large scale production
• Right man in the right place

11. Disadvantages
• Monotony
• Retards human development
• Industry de-humanized
• Loss of skill
• Risk of unemployment
• Disrupts family life
• Division of labour and evils of the factory system

12. Territorial Division of Labour
• Localization of industries
– Territorial division of labour is also called localization of
industries
– By localization we mean establishing industry at certain
place
• Causes of localization
– Nearness of raw material
– Nearness to source of power
– Proximity to market
– Availability of labour
– Availability of capital
– Political factor
– Religious factor
– Momentum of an early start

13. Capital
• Capital refers to that part of the man’s wealth
which is used to produce further wealth or
which yields income
• The term capital is used generally for capital
goods
– Plant and machinery
– Tools and accessories
– Raw material
– fuel

14. Capital Formation
• Capital formation means
– Increase in the stock of real capital in a country
• In other words
– capital formation involves making of more capital
goods such as machines, tools, factories, transport
facilities
• It means that
– society does not apply the whole of its current
productive activity to the desires of immediate
consumption
– but directs part of it to the making of capital goods

15. Stages of Capital Formation
• Creation of savings
– Depends on power to save and will to save
– Further depends on level of national income
• Mobilization of savings
– Mobilizing saving for investment by entrepreneurs
• Investment of savings on real capital
– Incentive to invest on real capital

16. Enterprise
• Entrepreneur's Role
– Coordinating and correlating the other factors of
production
– Organizing and risk-taking or uncertainty bearing
• Functions of Entrepreneurs
– Initiating a business enterprise by mobilizing and
harnessing the necessary productive resources
– Taking the final responsibility of the business
enterprise – risk taking and uncertainty bearing
– The entrepreneur’s role as innovator

17. Population Theories

18. Population Theories
• An economy supports population, but
population too support the economy
– It is the aim of an economy to supply people’s
wants for goods and services
– but the people too make an important
contribution to the productive capacity of an
economy
• There are two well-known theories
– Malthusian Theory
– Optimum Theory

19. Malthusian Theory
• Thomas Robert Malthus wrote his “Essay on
Principle of Population” in 1798 and modified
some of his conclusions in 1803.
• The rapidly increasing population of England
feared him and he tried to warn his countrymen
• By nature human food increases in a slow
arithmetical ratio; man himself increases with
quick geometrical ratio unless want and vice stop
him

20. Four Propositions
• The theory propounded by Malthus can be reduced to the
following four proposition:
– Food is necessary to the life of man and therefore, exercises a strong
check on population.
• Greater the food greater would be the population
– Human population increases faster than food production
• Malthus asserted that the population of a country tends to be double every
twenty five years but the food supply could be increased much less rapidly
– Population always increases when the means of subsistence increase
unless prevented by some powerful and obvious checks
• As the supply of food increases people will more children
– There are two types of checks
• Preventive checks
– Bringing down the birth rate
• Positive checks
– Increasing death rates
• If preventive checks will not be adopted then positive checks will be there

21. Criticism
• Pessimistic conclusions about miserable
conditions were not true
• Food production cannot keep the pace with
population growth
– However, by making rapid growth in technology
production increased greatly
• Only comparison of population with food
– Food from other sources in England
• Increase in food would lead to increase in
population
– Evidence shows vice versa

22. Optimum Theory
• Instead of maximum population modern
economists gave an idea of optimum
population
• By optimum population we mean that ideal
number of the population that a country
should have, considering its resources
– Under population and over population both are
dangerous

23. Optimum Level
• Before Optimum Level
– Natural and capital resources under utilized
– Production will be relatively inefficient
– Small market, small industry
– No economies of scale
• Optimum Level
– Natural and capital resources are fully utilized
– Maximum benefits from resources
• Beyond Optimum Level
– More workers so less productivity
– Food problems etc.

24. Limitations
• Impossible to determine the exact size of population which can be called
optimum
– Population experts have suggested different and conflicting numbers as optimum
• This concept is relative to natural resources, capital equipment and state of
technical knowledge
– It is assumed that these things are constant. However, these are constantly changing
– Thus, the theory is based on false assumptions
• Mere size of population is insignificant
– Age distribution, workers and non-workers
• Small population with hardworking and efficient people are more productive than
large population of lethargic people
• This theory ignores social, political and strategic and other aspects of population
• Concept is totally theoretical
– How to increase and decrease population if not optimum

25. Theory of Economic Transition
• The process of economic development, which has transformed
agrarian economy into urban, industrialized and market
oriented economies, has led to emergence of new theory – the
Theory of Demographic Transition
• The course of population was different as predicted by Malthus
• Before economic development
– Small industries  old techniques of production  low incomes 
children start working early  birth rates high  poor diet 
absence of preventive and curative medical practices  death rates
high
• After economic development
– Big industries  industrialization  medical facilities high  low
death rates  demand for having small family  small birth rates

26. Thank you
QUIZ
in Next class
Chapter 6, 7 and 11