UNIT – 4

Production & Factors of Production

DEFINITION-
Production means any activity whether physical or mental which
satisfy the wants of other people through exchange , A farmer is a
producer so is a trader

FACTORS AFFECTING THE VOLUME OF PRODUCTION

1. National/natural Resources – The volume of production in our
country depends to a great extent on the natural resources
available in our nation . for e.g- land , minerals , climate
condition , etc.
2. Human resources – Exploitation of the resources will be possible
only with help of man power. Therefore , adequate skilled labour
force is essential for increasing production.
3. Capital – Capital is an essential factors, the availability of which
determine the volume of production.
4. Credit & Banking – Scale of production cannot be increased
without sufficient credit facilities , extensive network of banking
facilities helps in expanding the scale of production.
5. Technique of production – Modern techniques of production
helps in improving the productivity of the firms , the evident we
can get form the phenomenal economic growth made by USA ,
Japan , etc.
6. Transport & Communication – Transport and communication
are also important in determining the volume of production.
Besides providing the place utility , they helps in mobility of
 factors of production and bringing buyers and sellers into close
contact with each other.

FACTORS OF PRODUCTION

Meaning :-
Transport factors of production are classified into land , labour , capital
, organization and enterprise. Factors of production are the agents
who cooperate in the production of any commodity.

1. LAND-
The term land refers to surface , it comes under those gifts which
are provided free to man by nature . According to Prof. Marshall
“ By land is meant not merely surface in the strict sense of the
words , but whole of the materials and forces which nature gives
freely for mans aid in land and water , in air and light and heat.

CHARACTERSTICS OF LAND
I. Free gift of nature – land is not made . it is a free gift of
nature . it requires no human efforts .

II. The supply of land is fixed – The total quantity of land is

fixed by nature . Man can increases the supply of other
factors of production like labour or capital but cannot
increases or decreases the quantity of land.
III. Land is a passive factors – Land is not an active factors , it
is inactive or passive factors.
 IV. Land differs in fertility – Different units of land differ from
each other . They differ into aspect situation and fertility .
V. Land has multiple uses – It is used for variety of purposes,
on land cultivation can be done ,factories can be set up ,
building can be raised , etc.

FACTORS AFFECTING PRODUCTIVITY OF LAND

I. Natural Factors – Natural factors like the soil , climate ,
rainfall and nature of cost line determine whether land
produces much or little
II. Human factors – Productivity of land also depends upon
the knowledge and training of workers . A wise cultivation
can be produce more from the same land than an
untrained cultivator.
III. Situation Factors – The situation of land is of great
importance . A land situated near the market is more
productive than a land located in a remote area. This is
because it requires less time and money to transport the
product.
IV. Qualities of Land – The productivity of land depends on its
natural qualities like if the land is flat and leveled , it will
produces more than ab undulating land.
V. Means od Irrigation – The means of irrigation also affect
the production , tubewills , tanks , etc. are more productive
than those which depends on rainfall.
VI. Improved Methods of Cultivation – The productivity of land
also increases if improved methods of cultivation like-
fertilizers, quality seeds , etc. are used
VII. Government policy and Research – Agricultural policy of
the government also considerably affects the productivity
of land . It starts increasing when the Govt. adopts a proper
 agricultural policy and provides inputs like finance seeds,
fertilizers , etc.

Importance of Land
Land has immense importance as a factor of production. Importance
of it can be studied under the following heads –
I. Economic Prosperity – The economic prosperity of a country
very largely depends upon the quality and the quantity of its
natural resources like - minerals, natural vegetation , rivers , etc.
II. Development of primary Industry – Agriculture , Fishery ,
forestry , mining , etc. are dependent on the nature i.e – land .
Thus , the development of primary industry is determined by the
quality of land found within the country
III. Development of manufacturing industries – The development of
manufacturing industries is greater depends on land because
seeds , etc. for these industries are supplied by agriculture.
IV. Other Importance – A. land or nature provides foods of all kinds
to human being
B. Land as a factor of production is liable to enjoy a reward called
rent.

2. LABOUR –
Labour is includes both physical and mental work
undertaken for some monetary reward. According to Thomas,
“Labour refers to all human efforts made by man , undertaken in
the expectation of reward or to earn a living”.
 CHARACTERSTICS OF LABOUR

1. Labour is perishable – If a worker does not work on a particular day

his labour for that day is wasted
2. Labour sells his labour, but not himself – The labour does not sell
himself , he sells his labour (efforts, knowledge, talent) only.
3. An active factor – Land is a passive factor but labour is an active
factor of production . labour , in context to its movement , labour
can move from one place to another
4. Weak bargaining power – The bargaining power of labour is weak
because the economic position of the worker is much weaker than
that of the employer.
5. Different in efficiency – All workers are not equal, they are different
in efficiency but their efficiency can be raised through training

TYPES OF LABOUR
• Productive & unproductive labour
• Skilled & unskilled labour
• Physical & Mental labour
1. PRODUCTIVE LABOUR – In modern times we consider all labour as
productive , which directly or indirectly increases the supply of
wealth. Any labour is productive if the produced goods and services
can be sold for a price

2. UNPRODUCTIVE LABOUR – The term unproductive labour is now

applied to wasted labour or misdirected labour , which has not
been able to achieve its purpose , for eg. A person digs well and
does not find water in it. His labour can be called unproductive.
3. SKILLED LABOUR – Skilled labour are those category of labour who
posses professional or specialized skill , for eg. Doctors, engineers ,
etc. are considered as skilled labour.

4. UNSKILLED LABOU – Unskilled labour are those category of worker

who do not require any professional or specialized skill. They are
also known as ordinary labours. Eg. – Watchmen , peons , etc.

5. PHYSICAL LABOUR – The work which involves the physical strength

is regarded as the physical labour , for eg. Ricksaw puller ,
woodcutter , etc.

6. MENTAL LABOUR – The work which is based on the mental strength

of human being is called the mental labour for eg. – the work of
doctor , lecturer , etc.

EFFICIENCY OF LABOUR

The supply of labour in a country depends not only on the numbers

but also on quantity of workers. Thus, the labour has two aspects ,
quantitative aspects as well as qualitative aspects
The quantitative is concerned with the size of labour whereas ,
qualitative is concerned with the efficiency of labour.
DEFINATION –
According to Moreland , “ By the word efficiency of
labour , we mean that the wealth produced by certain amount of
labour is larger relatively to the cost of labour spent.”

FACTORS AFFECTING EFFICIENCY OF LABOUR

1.PERSONAL 2. Social, political & 3. Condition of work
QUALITIES – Economic Condition –
a. Racial Qualities – a. Factory
b. Hereditary a. Climate Condition environment
Qualities b. Political condition b. Hours of works
c. Moral Qualities c. Social Condition c. Wages
d. Education and d. Religious effects d. Hope of future
Training e. Social security e. Job security
e. Standard of living
4 . Efficiency of 5 . OTHERS –
management – a. Labour union
a. Ability of b. Labour laws
organizer
b. Mutual
relationships

1. PERSONAL QUALITIES -

• Racial qualities – every person inherits certain qualities

from the race to which he belongs , For eg. The people of
northern India especially Rajputs or Punjabis are generally
more industrious and energetic than others.
• Hereditary qualities – Hereditary traits of parents or grand
parents influence the efficiency of the labour.
• Moral qualities - Honesty and devotion of work increases
the productivity of a worker
• Education and training – Education and training exerts a
predominant influence on the determination of efficiency
because they help in developing the dormant qualities of
workers.
• Standard of living – A worker having high standard of living
is more efficient than a worker having low standard of
 living . For eg. – The higher efficiency of worker in westerns
countries is partly due to their higher living standard.

2. Social , Political & Economic conditions –

• Climate condition - The climate of a country exerts a direct

influence on the efficiency of labour. For eg. – both very hot and
cool climate are unfavorable for effiecieny.
• Political Condition – The political condition in a country is
another major factor determining the efficiency of the workers.
When there is peace and favorable conditions for works, then
worker will perform their duties with more enthusiasm
• Social Conditions – If the workers belong to backward society
which is based on caste and creed relationships , workers will not
works in co – operative with the workers belonging to other
caste , thus , labour efficiency will be low.
• Social security – Workers will work more efficiency if they are
assured of health in sickness, oldage , free from fear of
unemployment , etc.
• Religious Effects – Religious beliefs obstructs efficiency as it
mostly happens in case of Indian workers.

3. CONDITIONS AND ATMOSPHERE –

• Factory environment – The working environment inside the factory
influence the will power of the worker to work. Insanitation , Lack
of light and air inside the factory adversely affect labour efficiency.
• Working Hours. – Long working hours without adequate rest and
intervals harms the efficiency of labour.
• Wages – Fair and prompt remuneration arrangement adds
efficiency of the workers. A worker should be adequately paid to
enable him and its family to meet the basic necessities of life.
• Hope for Future – If there are ample chances of promotion in future
, efficiency of the labour automatically increases, as a result he
takes keen interest in the work.
• Job Security – A worker who feels that he will not be turned out , at
the more wish of the employer is likely to be more efficient.

4. EFFICIENCY OF MANAGEMENT –
• Ability of the organizer – A good organizer can contribute
much toward promoting the efficiency of the worker . He
can give to his worker good quality raw materials, more
advance machines , low hours of work etc. all these will
make the worker to produce more.
• Mutual Relationship – For higher efficiency of labour, the
employer – employee relationship should be cordial.
There should be no misunderstanding on either side so
that a strike or lock out should be out of the question.
5. OTHER FACTOR –
• Trade union – Sometimes organization of labour
promotes efficiency of the worker, as good trade unions
induced better discipline which in turn promotes
efficiency of the worker.
• Labour Laws – Labour laws help to regulate hours of work,
wages , bonus and social security. These facilities reduces
strain and enhances the efficiency of the worker.

IMPORTANCE OF EFFICIENCY OF LABOUR

1. To workers(themselves)
Productivity of efficient workers will always be high.
As the workers produces more they will get more high wages.
Therefore , their standard of living will increase.
2. To Employers
An efficient labour will always be an assets to the employer , they
make proper utilization of resource and do not waste and material.

3. To Consumers
An efficient labour can produce goods in a short time and at a
low cost , so prices will be fixed low and the consumers will get the
goods at low rates
4. To Nation
Efficient labour is a national assets. For it tends to increase the
production of superior products at low costs. Due to this there will be
an increase in foreign trade also.

EFFICIENCY OF INDIAN LABOURS

It is said that Indian labour are comparatively less efficient than the
labours in western countries. The reason of this inefficiency are –

1. Indian worker are illiterate and have very little technical

training.
2. Indian workers are not so well paid as compared to the
worker of developed countries.
3. The working and living condition of most of the workers are
not so well organized.
4. The Indian climate makes the Indian sluggish (Tired very soon)
5. Obsolete machinery equipment and satisfactory supply of
raw materials
6. Indian labours are required to put in long hours of work
7. Indian are pessimistic (negative thinking) in their outlook
 8. Indian labours are properly organized

DIVISION OF LABOURS
In the older days when the wants of people were limited the
production was restricted to local only. People were sufficient and
they used to produce the goods themselves and fulfill their needs

Now – a – days the wants of the man are unlimited and he is always
unable to satisfy the wants by himself. The system of production has
become more complex. The increased knowledge, the increased
means of transportation etc. have enhanced the production in
factories.

Definition –
According to Watson , “ when the production is divided into specific
small sub – process and the help of expert person is taken in the
production then it becomes the ‘Division of labour’ ”

REQUISITES OF DIVISION OF LABOUR

1. Developed means of communication : The extent of market is
extensive then the division of labour will be possible.
2. Continues process of production : The division of labour is
possible in a state of continues process of production. If the
 production stops the labour force cannot be detained for a
longer time at a particular place.
3. Developed exchange system : Division of labour is possible under
developed exchange system only.
4. Production on large scale : Division of labour is possible under
production of large scale only. It is necessary that numbers of
labours must be quite enough.
5. Co – operative among labours : Divisions of labours is possible
when there is full co- operation among labours.

FORMS OF DIVISION OF LABOUR

1. Simple division of labour : Under this form, the work is done

by an individual separately such as farmer does farming,
carpenter does wooden works etc. In olden times, this forum
of division of labour was very popular.
2. Complex Division of labour : If the entire work is divided into
many sub- parts and if one labour does only that small parts
of the works, which is enter used to grim. It is known as
complex division of labour.
There are three forms of complex division of labour, They are:
A. Incomplete process of division of labours : The whole production
is divided into several process and each process is further sub –
divided into sub – process is handled by the experts, the produce
is treated as semi – produced article and is used as a raw material
by the other department.
B. Regional division of labour : When industries are localized region
wise and the labours are engaged there, it is known as regional
division of labour. Geographical division is the other name for it.
C. Complete Process division of labour : Under this type, the whole
production is divided into several process and separate work is
entrusted to each worker. This finished article of every worker is
used as a raw material by another worker.

ADVANTAGES OF DIVISION OF LABOUR

Advantages to –
1. Producers
2. Labourers
3. Society

1. Advantages to the Producers : The main advantages to the

producers –
a. Increased in production – The production of industries
increases due to increases due to division of labour
because the worker becomes efficient in performing a
particular type of work and only that part of work he is
an expert
b. Production of high quality – The production becomes of
high quality because it is being produced by the experts.
c. Time saving – Under division of labour, time is being
saved and more production may be made possible. The
working place of each worker is fixed in advance and he
 need not waste his time in searching the material and
the place of working.
d. Maximum utilization of machines – Each work is divided
into small sub – processes and each sub – process is done
with the help of machines. Thus, maximum use of
machines is made under division of labour.
e. Decrease in cost of production – Each worker may
become expert in producing the goods in less time and
thereby the cost of production per article will decrease.

2. Advantages to the Labourers :

a. Social Development of worker – thousands of workers
from different parts of the country come and work
together. They become not only conversant with the
customs and traditions of others but try to learn new
things from them. Therefore, they become socially
developed.
b. Saving of time and money – Under division of labour a
very small part is done by the worker, for which proper
training is imparted. Therefore, less time and money is
wasted in that work.
c. Co-operation – Production is done on large scale and
work is completed by several worker. The workers
develop a sense of co-operation among them.
d. Mobility of labour – The work is divided into several sub-
process and the work thus becomes so easy. It increases
the mobility of worker, it provides two advantages to
them. First , the worker gets better wages; second, at the
time of unemployment he may sasily be shifted to
another factory.
e. Increase in efficiency – Under division of labour, every
labour does the work of his own choice for a long time
due to which he becomes an expert and more efficient.
 f. Increase in remuneration – The remuneration of the
worker increase because the total production of the
factory increases which result in higher remuneration.
3. Advantages to the society:
a. More invention – The worker gets specialized knowledge in
his work and it provides enough time and opportunities for
new inventions.
b. Cheap goods – Society and consumers get cheap goods under
division of labour.
c. Maximum utilization of resource – Due to division of labour,
the resources of the country are utilized to its maximum
limits.
d. More employment opportunity – More industries get
improvement due to division of labour and it gives more
employment opportunities in the society.

DISADVANTAGES OF DIVISION OF LABOUR

Disadvantages to –
1. Labourers
2. Society
3. Producer

1. Labourers : The disadvantages of division of labour to the

Labourers are as follows:
a. Monetary of work – Division of labour brings, monetary of
work among the workers. By doing a particular type of work
for years together, the worker feels bored and he may not
take part activity and show interest in doing the work.
b. Exploitation of women and children – Many works of small
nature are being entrusted to women and children and they
are not given full remuneration for their work.
 c. Loss of efficiency – In division of labour each worker has to
learn a very small part of the work and this in turn decrease
the efficiency of the worker.
d. Lack of responsibility – The sense of responsibility in the
worker decline under division of labour. The responsibility of
the worker cannot be ascertained if the goods are not of
standard.
e. Lack in mobility of workers – The workers become useless in
doing other works and it decrease the mobility of workers.

2. Society:
a. Decrease in self-sufficiency – The factories are
dependent on the others and division of labour has thus,
decreased the self – sufficiency of the factories
b. Excessive production – Division of labour compels the
producers for more production and excessive
production may not fetch good demand in the market.
c. Conflict between masters and workers – The workers are
kept away from their master whenever differences in
interest arised, they used to come in direct conflicts with
each other, and the problems of strikes and lockouts are
followed.
d. Concentration of industries – Division of labour
encourages concentration of industries at a particular
place. Industries attract the workers which increases the
population of that particular area which results in many
malpractices like human trafficking etc.

3. Producers:
The disadvantages of division of labour to the
entrepreneurs are:
 a. Problem of management – Under division of labour, the
scale of production increases which creates the problems
of management and administration.
b. Encouragement to trade union – Under division of labour,
trade-unions get encouragement which enhances the
chances of increase in wage rates and strikes in the factory.

4. CAPITAL AND CAPITAL FORMATION.

Capital refers to that part of wealth of a country which is utilized for
further production of wealth.
Thus, tool implements machines of all kinds – buses, trucks, railways,
factory premises, raw materials etc. are all included in the category of
capital.

MEANING: According to Marshall, “Capital consists of those kinds of

wealth rather than free gift of nature which yields income.”

• CHARACTERISTICS OF CAPITAL

1. Capital is the result of labour

2. A mobile factor
3. A passive factor
4. Capital depreciates.
5. Capital is not a free gift, Capital grows out of saving.

• CLASSIFICATION OF CAPITAL
Classification of capital
1. Fixed and circulating capital
2. Material and personal capital
 3. Remuneratory and auxiliary capital
4. Internal and external capital
5. National and international capital
6. Private and public Capital
7. Trade and Social capital

• IMPORTANCE OR FUNCTIONS OF CAPITAL

1. Productivity and growth

2. Provision of subsistence
3. Technological Development
4. Provision of raw materials
5. Advertisement
6. Research and development
7. Increases in Employment

• CAPITAL FORMATION
Capital formation means an addition to the stock of capital
goods in the country. The capital goods comprise such things as
Machinery, plant, tools, factory, etc. which can be used for
further production.

DEFINITION – According to Benham – “ The amount a country

adds to its capital during a period is known as the capital
formation during that period”

• FACTORS INFLUENCING CAPITAL FORMATION

 1. An increase in the volume of real saving affects the capital
formation of the country.
2. Existance of a good capital market so that these saving could be
mobilized for capital formation.
3. The act of investment itself, so that resources are actually used
for the production of capital goods.

CAPITAL FORMATION

Supply of capital Demand for capital or investment

Savings Mobilization of savings

a. Increasing savings –
The total saving in a country comprises of :
1. Household saving
2. Saving by business corporations
3. Saving by government
4. Foreign savings
b. Mobilization of savings – The next process of savings is that it
must be mobilized converting into investible funds
c. Investment of saving – The third step in the process of capital
formation is the investment of saving in creating real assets.

5. ORGANISATION AND ENTREPRISE

DEFINITION: According to prof. Benham, “Organization means

directing, deciding and designing the forms of business”

DEFINITION: According to prof. Knight, “ An entrepreneur is a person

who performs dual function of risk-taking and control”
 FUNCTION OF AN ENTREPRENEUR

Organization, control and management Risk taking function

coordination and supervision

1.
a. Conceiving and initiating business idea
b. Size of business
c. Scale of production
d. Application of innovation
2
e. Arrangement of machinery
f. Provision of labour
g. Provision of Capital
h. Distribution of reward
i. Relation with the government

• QUALITIES OR EFFICIENCY OF AN ENTREPRENUER

For the efficient functioning of the firm, the entrepreneur should

possess multi-qualities of head and heart. The various qualities of a
good entrepreneur are –
1. Self-confidence: Entrepreneurs should have confidence in their
abilities to make both strategic and day-to-day decisions.
 2. Ability to organize: The entrepreneur should have the ability to
organize the business in the best possible way.
3. Leadership: The entrepreneur must be a successful leader of
men.
4. Far sightedness: The entrepreneur must be farsighted. He should
possess the ability to foresee the change in the market so as to
adjust his business accordingly.
5. Knowledge of business: He should have full and complete
knowledge about his business to that he may not be tricked by
his employees.
6. Experienced: He must be experienced and skilled person to run
the business.
7. Good innovator: An important quality of a successful
entrepreneur is that he must be a good innovator.

• COST AND REVENUE ANALYSIS

Cost are the total money expenses incurred by a firm in producing a

commodity. They include salaries and wages, rent and interest, cost of
raw material, depreciation, advertisement expenses etc.

PRODUCTION COST: In the production process, many fixed and

variable factors are used. They are employed at various prices. The
expenditures incurred on them are the total cost of production of a
firm. Such costs are divided into two parts:
1. Total variable cost: Those expenses of production which change
with the change in firm’s output. Larger output requires larger
inputs and vice-versa.
2. Total Fixed cost: Those expenses of production which do not
change with the change in output. For eg. Rent, salaries and
wages of permanent staff.
 • OPPORTUNITY COST
Since the resources are scarce, they cannot be used to produce all
things simultaneously. If they are used in the production of one
product, they have to be withdrawn from other uses. Thus, the cost of
one is the alternative foregone.
According to the Benham, “The opportunity cost of anything is the
next best alternative that could be produced instead by the same
factors or by an equivalent group of factors, costing the same amount
of money.
The concept of opportunity cost is explained with the help of
production possibility curve PP1. At the combination A, the producer
uses OL1 of labour and OK1 of capital, If he wants to use L1L2 more
labour, He will have to forgo K1K2 of Capital. Thus, the opportunity
cost of L1L2 Labour is K1K of capital.

• PRIVATE AND SOCIAL COST

The term private and social cost were first used by Pigou in his The
economics of welfare(1932).
Private cost are the cost incurred by a firm in producing a commodity
or services. For eg – Production of commodities like steel, rubber, etc.
The production of such services like education, park facilities,
construction of roads and bridges etc. leads to social benefits, is
known as social cost.

• REVENUE ANALYSIS
The term revenue refers to the receipt obtained by a firm from the
sales of certain quantities of a commodity at various prices. There are
3 types of revenue:
1. Total revenue
2. Average revenue
3. Marginal revenue
 1. Total revenue is the total sale proceeds of a firm by selling a
commodity at a given price. Example – If a firm sells 2 units of
a commodity at ₹18, its total revenue is 2 * 18 Rs = 36Rs
2. Average revenue is the average receipts from the sale of
certain units of the commodity. It is found out by dividing the
total revenue by the number of units sold. For example
36 Rs/2=18Rs
3. Marginal revenue is the addition to total revenue as a result of
a small increase in the sale of a firm. Example: Suppose 2 units
of a commodity are sold at a total revenue of 36 Rs and 3 units
at the total revenue of 54 Rs, The marginal revenue will be 18
Rs. MR=TRn-TRn-1

• AVERAGE REVENUE AND MARGINAL REVENUE

UNDER PERFECT COMPETITION
The relation between AR and MR are discussed under pure
competition. The AR curve is a horizontal straight line parallel to the
X-axis and the MR curve coincides with it. This is because, under
perfect competition the number of firm selling an identical product is
very large. The price is determined by the market forces of supply and
demand so that only one price trends to prevail for the whole industry.

• AR – MR CURVE UNDER IMPERFECT

COPETITION
The AR curve is the downward sloping industry demand curve and its
corresponding MR curve lies below it. The relation between AR and
MR under imperfect competition can be understood with the help of
this graph

In India, AR and MR are downward sloping MR cuts the horizontal line

between X-axis and AR cannot be zero.

• IMPORTANCE OF REVENUE CURVES

1. Revenue curves are important for the determination of price and
profit.
2. Equilibrium determined – with the help of revenue curves, we can
determined the equilibrium points at various prices and quantities.
3. Factors pricing determination – The prices of all he factors of
production that we use in producing the desired output can be
determined with the use of the revenue curves.