This document discusses factors of production and population theories. It defines the four main factors of production as land, labor, capital, and organization/enterprise. It describes each factor and how they work together in the production process. The document also discusses Malthus' theory of population, which argues that population grows geometrically while food production grows arithmetically, leading to poverty. It notes criticisms of Malthus' pessimistic view and introduces the optimum population theory of finding the ideal population size based on a country's resources.

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