INTRODUCTION

NAME OF STUDENT: SANGEETA DIXIT

STANDARD: BLS LLB 1ST YEAR
ACADEMIC YEAR: 2021-22
SUBJECT : ECONOMICS

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 ECONOMICS PROJECT

ACADEMIC YEAR: 2021-22

TITLE OF PROJECT

FACTORS OF PRODUCTIONS AND THEIR PRICING :

LAND & RENT

SHREE L.R.TIWARI COLLEGE OF LAW CERTIFICATE

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 I am pleased to certify that SANGEETA DIXIT student of BLS LLB (1
years) semester 1 roll no __ of shree L.R tiwari college of law has pursued the
research work / project

This project is being submitted to shree L.R tiwari college of law, mira road,
affiliated to the university of Mumbai, in fulfillment of the requirement of 60-40
internal submission as per the university of Mumbai norms.

Adv. Dharmesh Mehta

(T/c principal)
Shree L.R Tiwari college law

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Sr.no Content Page no

1 INTRODUCTION 5

2 CONTENT 6

3 CONCLUSION 10

4 REFERENCES 11

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 INTRODUCTION TO MICROECONOMICS

The word ‘Micro’ is derived from the Greek word mikros meaning, small. Microeconomics deals
with small segments of the society. Microeconomics is defined as the study of behavior of
individual decision-making units, such as consumers, resource owners and firms. It is also
known as Price Theory since its major subject-matter deals with the determination of price of
commodities and factors.
Microeconomics has both theoretical and practical importance. It solves the three central
problems of an economy, i.e., what, how and for whom to produce.

Microeconomics studies how the behaviors of individual market participants—such as buyers,

sellers, and business owners—affect the allocation of resources. It will show you how small
individual choices shape today’s complex economic systems.
It seeks to make sense of the behavior of individuals, households and firms. It aims to answer
questions such as: if incomes rise, how will individuals spend their surplus income, and on
what? If the price of goods change, how will household spending habits shift? If the price of oil
increases, how will firms react and what impact will this have on the price of goods and
services?

Importance of Microeconomics:

It is clear from the following points:

1. Microeconomics helps in formulating economic policies which enhance productive

efficiency and results in greater social welfare.

2. Microeconomics explains the working of a capitalist economy where individual units

(i.e., producers and consumers) are free to take their own decision.

3. Microeconomics describes how, in a free enterprise economy, individual units attain

equilibrium position.

4. It helps the government in formulating correct price policies.

5. It helps in efficient employment of resources by the entrepreneurs.

6. It helps business economist to make conditional predictions and business forecasts.

7. It is used to explain gains from trade, disequilibrium in the balance of payment position
and determination of international exchange rate.

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 CONTENT

Production
 It is a process of combining various inputs to make something for consumptions.
Production is an outcome of economic activity. For making or producing something,
we need some tangible and intangible materials.

 These materials are the various factors of production. Consider a simple example of
paper crafting. To make an origami, we need paper, money to buy it, and the most
important technique of folding.

 Factors of production can be defined as inputs used for producing goods or services with
the aim to make economic profit. These include any resource needed for the creation of a
good or service.

 The modern definition of factors of production is primarily derived from a neoclassical

view of economics. It amalgamates past approaches to economic theory, such as the
concept of labor as a factor of production from socialism, into a single definition.

 Ownership of the factors of production depends on the type of economic system and
society. They are the resources people use to produce goods and services; they are the
building blocks of the economy. Economists divide the factors of production into four
categories: land, labor, capital, and entrepreneurship.

 They are the inputs needed for supply. They produce all the goods and services in an
economy. That's measured by gross domestic product.

 Anything that helps in production is the factor of production. These are the various factors
by mean any resource is transformed into a more useful commodity or service.

 They are the inputs for the process of production. They are the starting point of the
production process. Factors of production are the parameters which affect the output of
production.

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Land as a Factor of Production:

Land has a broad definition as a factor of production and can take on various forms, from
agricultural land to commercial real estate to the resources available from a particular piece of
land. Natural resources, such as oil and gold, can be extracted and refined for human
consumption from the land. Cultivation of crops on land by farmers increases its value and
utility. For a group of early French economists called the physiocrats who pre-dated the classical
political economists, the land was responsible for generating economic value.

While the land is an essential component of most ventures, its importance can diminish or
increase based on industry. For example, a technology company can easily begin operations with
zero investment in land. On the other hand, the land is the most significant investment for a real
estate venture.

In its simplest form, land is the physical place where economic activity takes place. In our
lemonade stand example, it could be the patch of lawn in front of your house. However, land
also includes all the natural resources found on it.

Resources can include timber, water, oil, livestock, and so forth. So if you used real lemons from
a tree in your yard to make that lemonade, you used part of the land. Land plays an important
part in production because land itself and the resources on it are usually limited. Political
regulations prevent a person from just going and claiming something for themselves, or there
may not be enough for everyone to have. Also, many of the natural resources are nonrenewable,
meaning that their amount is fixed, and they can't be used indefinitely. Thus, producers must
carefully manage land and its resources.

Land is short for all the natural resources available to create supply. It includes raw property and
anything that comes from the ground. It can be a non-renewable resource. That includes
commodities such as oil and gold. It can also be a renewable resource, such as timber.

Once man changes it from its original condition, it becomes a capital good. For example, oil is a
natural resource, but gasoline is a capital good. Farmland is a natural resource, but a shopping
center is a capital good.

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Characteristics of Land as a Factor of Production
 The land is a free gift of nature.
 The land has no cost of production.
 It is immobile.
 The land is fixed and limited in supply.

Types of Land
1. Residential
2. Commercial
3. Recreation
4. Cultivation
5. Extraction
6. Uninhabitable

Rent:

David Ricardo defined rent as “that portion of the produce of the earth which is paid to the land
lord for the use of original and indestructible powers of the soil”. Thus, rent is only a payment
for the use of land. The income earned by owners of land and other resources is called rent.

Ricardian Theory of Rent According to Ricardo, rent is the payment for the use of only land and
is different from contractual rent which includes the returns on capital investment made by the
landlord in the form of wells, irrigation structures etc. besides the payment for the use of land.

Ricardian rent is also known as pure rent.

The true economic rent is only a payment for the use of land. It excludes interest on landlord’s
investment. The Ricardian theory of rent is based on the following assumptions: i) Land differs
in fertility. ii) The most fertile lands are limited in supply.

In economics, economic rent is any payment to an owner or factor of production in excess of the
costs needed to bring that factor into production. In classical economics, economic rent is any
payment made (including imputed value) or benefit received for non-produced inputs such as
location (land) and for assets formed by creating official privilege over natural opportunities
(e.g., patents).

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In the moral economy of neoclassical economics, economic rent includes income gained by labor
or state beneficiaries of other "contrived" (assuming the market is natural, and does not come
about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.

In the moral economy of the economics tradition broadly, economic rent is opposed to producer
surplus, or normal profit, both of which are theorized to involve productive human action.

Economic rent is also independent of opportunity cost, unlike economic profit, where
opportunity cost is an essential component. Economic rent is viewed as unearned revenue,
whereas economic profit is a narrower term describing surplus income greater than the next best
risk-adjusted alternative. Unlike economic profit, economic rent cannot be theoretically
eliminated by competition, since all value from natural resources and locations yields economic
rent.

For a produced commodity, economic rent may be due to the legal ownership of a patent (a
politically enforced right to the use of a process or ingredient). For education and occupational
licensing, it is the knowledge, performance, and ethical standards, as well as the cost of permits
and licenses that are collectively controlled as to their number, regardless of the competence and
willingness of those who wish to compete on price alone in the area being licensed.

In regard to labor, economic rent can be created by the existence of mass education, labor laws,
state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some
workers, where collective action creates a scarcity of such workers, as opposed to an ideal
condition where labor competes with other factors of production on price alone). For most other
production, including agriculture and extraction, economic rent is due to a scarcity (uneven
distribution) of natural resources (e.g., land, oil, or minerals).

When economic rent is privatized, the recipient of economic rent is referred to as a rentier.

By contrast, in production theory, if there is no exclusivity and there is perfect competition, there
are no economic rents, as competition drives prices down to their floor.

Economic rent is different from other unearned and passive income, including contract rent. This
distinction has important implications for public revenue and tax policy.

As long as there is sufficient accounting profit, governments can collect a portion of economic
rent for the purpose of public finance. For example, economic rent can be collected by a
government as royalties or extraction fees in the case of resources such as minerals and oil and
gas.

Historically, theories of rent have typically applied to rent received by different factor owners
within a single economy. Hossein Mahdavy was the first to introduce the concept of
"external rent", whereby one economy received rent from other economies.

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 CONCLUSION

If businesses can improve the efficiency of the factors of production, it stands to reason that
they can create more goods at a higher quality and perhaps a lower price. Any increase in
production leads to economic growth as measured by GDP. GDP is merely a metric that
represents the total production of all goods and services in an economy.

Improved economic growth raises the standard of living by lowering costs and raising wages.

Capital goods include technological advances from iPhones, to cloud computing, to electric cars.
For example, in the last several years, the technology of fracking or horizontal drilling has led to
improved extraction of oil making the U.S. one of the world's largest oil producers. The
innovation couldn't be done without the labor behind the process, from conceptualization to the
finished product.

However, as technology helps to increase the efficiency of the factors of production, it can
also replace labor to reduce costs. For example, artificial intelligence and robotic machines
are used in manufacturing boosting productivity, reducing costly errors from human beings,
and ultimately reducing labor costs.

Of course, nothing gets started without the entrepreneurs who create a vision and the action
steps needed to design the production process. Entrepreneurs combine all the factors of
production, including buying the land or raw materials, hiring the labor, and investing in the
capital goods necessary to bring a finished product to market.

As Parmenides, a Greek philosopher, famously quipped, "Nothing comes from nothing."

Economic growth results from better factors of production. This process is clearly demonstrated
when an economy undergoes industrialization or other technological revolutions; each hour of
labor can generate increasing amounts of valuable goods.

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 REFERENCES

 Economics (Five year law course)- By Dr. Sunil George

 https://www.investopedia.com/ask/answers/040715/why-are-factors-
production- important-economic-growth.asp
 https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-
2- factors-of-production

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