Factors Of Production2009 4


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Factors Of Production2009 4

  1. 1. Factors of Production Foundation Economics BIMTECH June 2009
  2. 2. Production <ul><li>Production is any economic activity undertaken to satisfy other people’s want through exchange. Material goods and services are produced to satisfy human wants. Services of factors of production are needed to undertake any production activity. </li></ul><ul><li>Production involves creation of utility / transformation of material things and the process of exchange. </li></ul><ul><li>Economists, define the term production to cover the whole process whereby man adapts natural resources to his needs until the product is in the hands of the final consumers. </li></ul><ul><li>In production, land, labor, capital and enterprise combine and the result of their efforts is called ‘income’ or ‘dividend’. This income has to be shared amongst those who have contributed to produce it. It thus goes back to them as rents, wages, profits and interest. </li></ul>
  3. 3. Production (contd….) <ul><li>Creation of Utility (Production) </li></ul><ul><li>Form Utility : Existing matter is transformed to make them suitable for use. Eg : Carpenter makes wooden planks into furniture. </li></ul><ul><li>Place Utility : Transporting an object from one place to another. </li></ul><ul><li>Time Utility : To create time utility is to make things available when required. Eg : Rice is harvested in winter, but it’s demand continues throughout the year. </li></ul><ul><li>Knowledge Utility : Machines etc. become useful only when people possess necessary knowledge to operate them. </li></ul><ul><li>Possession Utility : Commodity is possessed by a person who can derive satisfaction out of it. </li></ul>
  4. 4. <ul><li>Only those goods and services are included in production which possess the following characteristic : </li></ul><ul><li>They are created by human capital and labour. </li></ul><ul><li>They are capable of satisfying human wants directly or as producers goods indirectly. </li></ul><ul><li>They are comparatively scarce and need to be economized and have economic value and a definite price or cost. </li></ul><ul><li>Domestic work done by a family member, voluntary services with an objective of social welfare, goods produced for self consumption, leisure time activities are excluded from Production. </li></ul><ul><li>Productive activity: </li></ul><ul><li>Any activity which generates new income in the economy is called a Productive activity. While which does not generate new income is an unproductive activity. Eg : Pension, scholarship etc. </li></ul>Production (contd….)
  5. 5. Factors of Production <ul><li>Land </li></ul><ul><li>Labor </li></ul><ul><li>Capital </li></ul><ul><li>Organisation / Enterprise </li></ul>INPUTS Factor Inputs Non - Factor Inputs Land Labor Capital Enterprise Raw Materials and other goods from other producing units Some economists prefer to classify factors of production in two broad categories : Labor (Includes services of workers and entrepreneurs) Capital (Land + Building plant + machinery etc.)
  6. 6. <ul><li>LAND </li></ul><ul><li>Includes all those natural resources, whose total supply in the economy is fixed inelastic. Land is: </li></ul><ul><ul><li>Free gift of nature </li></ul></ul><ul><ul><li>Has inelastic supply </li></ul></ul><ul><ul><li>Immobile </li></ul></ul><ul><ul><li>Passivity (Cannot by itself produce anything) </li></ul></ul><ul><ul><li>Heterogeneity : Differs in fertility and can have a variety of uses . </li></ul></ul><ul><ul><li>LABOR </li></ul></ul><ul><ul><li>May be defined as any human exertion of the body or mind undertaken with a view to produce material things and services. Labor should result in some economic reward or income to the laborer. Labor is: </li></ul></ul><ul><ul><li>Active factor of production </li></ul></ul><ul><ul><li>Perishable </li></ul></ul><ul><ul><li>Inseparable from the laborer </li></ul></ul><ul><ul><li>Productivity can improve </li></ul></ul><ul><ul><li>Supply is inelastic during the short run </li></ul></ul><ul><ul><li>Differs in productivity </li></ul></ul><ul><ul><li>Labor is mobile </li></ul></ul>
  7. 7. Division of Labor <ul><li>Division of labor refers to a scheme of dividing the given activity among workers in such a way that each worker is supposed to do one activity or only a small part of that activity. Division of Labor leads to specialization of functions and co-operation between different laborers . Specialization of work and process helps laborer to improve his efficiency and it is also beneficial to society. </li></ul><ul><li>Types of Division of Labor: </li></ul><ul><li>Professional division of labor : Tailor, carpenter etc. </li></ul><ul><li>Process based : Large business enterprises divide and sub-divide the process of production of a single commodity and each worker performs one or two activities of the several processes. </li></ul><ul><li>Territorial Specialization : Based on the diversities in natural conditions, industries are set up in different places. Lucknow has specialized in chikankari, Srinagar in carpets etc. </li></ul>
  8. 8. Division of Labor <ul><li>Advantages of Division of Labor: </li></ul><ul><li>Division of labor results in specialization. Quality goods can be produced, skill and dexterity improves with division of labor. </li></ul><ul><li>Economizes use of man and material. </li></ul><ul><li>Makes it possible to use machinery in the small processes. </li></ul><ul><li>Work can be assigned according to one’s ability. </li></ul><ul><li>Mobility of labor increases. </li></ul><ul><li>Improves inventive genius of labor. </li></ul><ul><li>Disadvantages of Division of Labor </li></ul><ul><li>Leads to lopsided development of workers personality </li></ul><ul><li>Worker loses interest and monotony sets in. </li></ul><ul><li>Specialization could be harmful when their services are not in demand. Over-occupation with their specialized job may render them useless for other jobs. </li></ul><ul><li>Mobility of Labor </li></ul><ul><li>Territorial Mobility : Refers to the willingness of labor to move from one geographical location to another in search of job prospects. </li></ul><ul><li>Occupational Mobility: Refers to the willingness of labor to shift from one occupation to another. </li></ul><ul><li>Grade Mobility : Refers to the movement from one position to another in the same occupation. Grade mobility can be: Horizontal mobility or Vertical mobility </li></ul>
  9. 9. Capital <ul><li>Comprises of man made material which is used for further production. </li></ul><ul><li>Consumer Goods : Goods which directly satisfy human wants. </li></ul><ul><li>Producer goods : Goods which indirectly contribute ie. They are used for production of consumer goods. </li></ul><ul><li>Capital is that part of money, income and wealth which is used for further production. </li></ul>
  10. 10. Classification of Capital <ul><li>Fixed and Circulating capital : Fixed capital is one which is durable and is used in production for a long time. Eg : Machines, Dams etc. Circulating capital refers to the capital which is used only once in production. It loses it’s utility after single use. Eg : Cash converted into stock in business, raw materials, seeds etc. </li></ul><ul><li>Material and Personal Capital : Material capital consists of objects which exist in concrete and tangible form and can be transferred . Eg : Machines. Personal capital is non transferable and comprises of all those energies etc. which contribute to make labor efficient. </li></ul><ul><li>Sunk and Floating Capital : Sunk capital is one which can be used in a specialized occupation. Eg : Railway bridges, dams etc. Capital is said to be floating when it can be changed at will for employment in any branch of industry. Eg: Wood, raw material </li></ul><ul><li>Internal and External Capital : Capital which is the result of domestic savings in the country is Internal Capital while capital imported or invited from abroad is external capital. </li></ul>
  11. 11. Classification of Capital <ul><li>Production and Consumption Capital : Production capital consists of those articles which help the labor directly in production while consumption capital consists of those materials which indirectly assist in production process. Eg : Residential accommodation, vehicles etc. </li></ul><ul><li>Capital Formation is the surplus of production over consumption in an accounting year which is used for further production. Generally speaking, higher the capital formation more economically developed an economy would be as capital formation has a cumulative effect on the economy. </li></ul><ul><li>Stages of Capital Formation: </li></ul><ul><li>Savings: Formation of capital depends on the will to save, power to save and ability to save. Higher income results in higher savings as with an increase in income the marginal propensity to consume declines and proportion of income that is saved increases. </li></ul><ul><li>Mobilization of savings is important as hoarded money does not facilitate the process of capital formation. There should be a widespread banking network. </li></ul><ul><li>Process of capital formation gets completed only when real savings get converted into capital assets. </li></ul>
  12. 12. Enterprise <ul><li>Business is full of risk and uncertainities. The task of bearing risks is called Enterprise. The man who bears the risk is called the Entrepreneur. </li></ul><ul><li>Functions of Enterprise : </li></ul><ul><li>Risk bearing function : The most important function of an entrepreneur is to bear risk of business. There is always a time lag between production and consumption of goods. Heavy risk is involved in equating the current production to future demand. </li></ul><ul><li>Decision taking function : Selection of Product; selection of type of firm; selection of location of plant; selecting techniques of production; selection of size of firm. </li></ul><ul><li>Innovative Function. </li></ul><ul><li>Optimum Firm : </li></ul><ul><li>It is defined as the organization of business enterprise which in given circumstances of technology and market for it’s product can produce goods at the lowest average unit costs in the long run. </li></ul>