Lecture 5Factors of Production

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Population Theories

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

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

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

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

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

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.

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

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

Thank you

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Chapter 6, 7 and 11