Production

 Production means creation of utility ( – satisfying

goods and services), It also creates value.

 Production also means transformation of one set

of goods into another.

 A good may be transformed by being

 physically changed (form utility)
 Transported to the place of use (place utility)
 Kept in store till required time (time utility)
Factors of production
 Resources used for production.
 These resources may be raw materials, or services
of the various categories of workers, or capitals
or organizing the works of production.
 Types:
 Land: all natural resources
 Labour: all human resources
 Capital: all man-made resources
 Entreprenuership/ Management/ organisation: brings
all the previous resources together for production
 Land
 Land has been given a special meaning in economics.

 It does not only mean soil as in the ordinary speech. It

represents those natueral resources which are useful and
scarce, actually and potentially.

 According the word of Marshall, land means “the

materials and forces which nature gives freely for man’s
aid, in land and water, in air and light and heat.”Natural
resources
Characteristics/ peculiarities of land
1) Free gift of nature- land is a gift of nature given to
man free of cost
2) Limited in supply- other factors of production can be
increased in supply to a greater or lesser extent. but it
is impossible to increase the supply of land.
3) Lacks mobility and geographical sense.
4) Permanent and indestructible.
5) Infinite variation of degrees of fertility and situation
so that no two pieces of land are exactly alike.
 Labour
 In Marshall’s word, “Any excertion of mind
or body undergone partly or wholly with a
view to some good other than the pleasure
derived directly from work, is called labour”
 Characteristics of labour
 Labour is inseparable from labourer himself.
 Labour has to sell his labour in person.
 Labour does not last. It is perishable. The Labour has to
accept the wage offered to him.
 Labour has a very weak bargaining power.
 Changes in the price of labour react rather curiously on its
supply.
 There can be no rapid adjustment of the supply of labour to
demand for it, because supply cannot be increased quickly,
nor it can be reduced.
Labour Supply
 Measured in terms of time (man hour)

 Labour supply = no. of workers x no. of working

hours per worker

 Factors affecting labour supply:

 Size of population
 Size of working population
 No. of working hours
How to increase labour supply?
  population growth (by natural growth or
immigration)
  monetary rewards
  import of labour from other countries
  retirement age (e.g. from 60 to 70)
  school leaving age (e.g. from 16 to 17)
Labour productivity
 Measured in terms of output per unit of
labour
Average labour productivity = average output per man hour

June 2005 Firm A Firm B

Number of working hours per worker 240 180
Units of output 7200 6400
Average labour productivity 30 35.6

Firm B has a higher labour productivity than firm A

How to raise labour productivity?
 Other factors of production( quantity &
quality)
 Better management or organization. e.g.
division of labour
 Better working conditions
Factors determining the efficiency of labour
 Racial qualities
 Climatic factors
 Better education and training
 Personal qualities
 Industrial organization and equipment
 Factory environments
 Working hours
 Fair and prompt payment
 Greater fringe benefits (housing allowances,
medical care, bonus, meal..)
 Social and political factors
Division of labour: when making of an
article is split up into several processes and
each process is entrusted to a separate set of
workers, is called division of labour.

1. Simple division of labour

2. Complex division of labour
3. Regional division of labour
 Three types of division of labour
 Simple: division of society into major
occupations, e.g., carpenters, weavers etc.

 Complex: making of an article is split up into

several processes and sub-processes.

 Territorial: refers to certain localities, cities,

towns specializing in the production of some
commodities.
 Regional division of labour
 Different countries specialize in producing
different products
 Japan : car production
 USA: airplane production
 Saudi Arabia: oil production

 US example
 California (fruit growing)
 Detroit (car manufacturing)
 Silicon Valley (IT industries)
Advantages of Division of Labour
 Increase productivity
 Increase skill
 Inventions are facilitated
 Introduction of machinery facilitated
 Time saving
 Saves in tools and implements
 Best selection of workers/ Right man in the right place
 Diversity of employment
 Large scale production
 Raising living standard
 more leisure
 greater world output
Disadvantages of division of labour
 Work becomes dull and monotonous
 Retards human development
 Industry de-humanised
 Loss of skill
 Greater risk of unemployment
 Disrupts family life
Territorial Division of Labour
 Causes of localization
 Nearness to raw materials
 Nearness to sources of power
 Proximity to market
 Availability of labour
 Availability of capital
 Political factors
 Religious factors
 Capital
 Capital refers to that part of human’s wealth which is
used for producing further wealth or which yields an
income.
 Man-made resources used for further production/
Produced means of production.
 Examples: machines, raw materials, tools, buildings,
fuel etc.
 Features:
 Man made
It raises the productivity of other factors
 Importance of capital
 Capital plays a vital role in the modern productive
system.
 Production without capital is hard to imagine.
 Nature cannot furnish goods and materials to man unless
he has tools and machines.
 Capital occupies a central role in the process of economic
development.
 Creates employment opportunities in the country.
 In two stages:
 When the capital is produced, some workers have to be employed to make
capital goods like machinery, factories, dams, irrigation works.
 More men have to be employed when capital has to be used for producing
further goods.
 No economic development is possible
without the construction of irrigation
works, the production of agricultural tools
and implements, land reclamation, building
of dams, bridges and factories with
machines installed in them, roads, railways,
airports, ships and harbours – all produced
means of production.
 Capital formation
 Increase in the stock of real capital in a country.

 Capital formation involves making of more capital goods such

as machines, tools, factories, transport equipment, materials,
electricity, etc.

 For making additions to the stock of capital, savings and

investments are essential.

 In order to accumulate capital goods, some current

consumption has to be sacrificed.
 The greater the extent of people are willing to abstain from present
consumption, the greater the extent of new capital formation.
Process of capital formation
 (i) Creation of savings
 (ii) Mobilization of savings
 (iii) Investment of savings into real capital.

 Savings are done by (a) individual or

households, (b) business enterprises (c)
government.
 Savings may be
 Voluntary: when people will to save
 Forced: collection of tax by the government
(i) Creation of savings
 The level of Savings in a country depends on the
power to save and willingness to save.

 The higher the level of income, the greater the amount

of savings. The people of USA can save more than
Bangladeshis.
 People want to save in order to
 provide against old age and unforeseen emergencies.
 To start business or to expand business.
 Education, marriage, and for their childrens’ future.

 Savings of govt.: the greater the amount of tax collected, the

greater will be the govt. savings. The savings are used for
building up new capital goods.
(ii) Mobilization of savings
 Capital must be mobilized and transferred to
businessmen and entrepreneurs who need them for
investment.

 In the capital market, funds are supplied by the

individual investors, banks, investment trusts,
insurance companies, finance corporations,
government, etc.

 For capital formation, the development of capital

market is necessary.
(iii) Investment of savings
 Savings must be invested to be transferred into
real capital.
 For that, there must be a good number of honest
and dynamic entrepreneurs who are able to take
risks and bears uncertainty of production.
Foreign capital
 Can take the form of
 Direct private investment by foreigners
 Loans or grants by foreign governments
 Loans by international agencies like world
bank.
 Entrepreneurs and their role
 The entrepreneur who is a business leader looks for ideas and puts
them into effect in fostering economic growth and development.
 Entrepreneurs accept many risks and responsibilities for the
sake of profits and personal satisfaction.
 The entrepreneur acts as a trigger head to give spark to economic
activities by his entrepreneurial decisions.
 He plays a pivotal role not only in the development of industrial
sector of a country but also in the development of farm and
service sector.
 The major roles played by an entrepreneur in the economic
development of an economy has been discussed in a systematic
and orderly manner.
(1) Promotes Capital Formation:
Entrepreneurs promote capital formation by mobilising the idle savings of public. They employ
their own as well as borrowed resources for setting up their enterprises. Such type of
entrepreneurial activities lead to value addition and creation of wealth, which is very
essential for the industrial and economic development of the country.

(2) Creates Large-Scale Employment Opportunities:

Entrepreneurs provide immediate large-scale employment to the unemployed which is a chronic
problem of underdeveloped nations. With the setting up.of more and more units by
entrepreneurs, both on small and large-scale numerous job opportunities are created for
others. As time passes, these enterprises grow, providing direct and indirect employment
opportunities to many more. In this way, entrepreneurs play an effective role in reducing the
problem of unemployment in the country which in turn clears the path towards economic
development of the nation.

(3) Promotes Balanced Regional Development:

Entrepreneurs help to remove regional disparities through setting up of industries in less
developed and backward areas. The growth of industries and business in these areas lead to a
large number of public benefits like road transport, health, education, entertainment, etc.
Setting up of more industries lead to more development of backward regions and thereby
promotes balanced regional development.
 (4) Reduces Concentration of Economic Power:
 Economic power is the natural outcome of industrial and business activity.
Industrial development normally lead to concentration of economic power in the
hands of a few individuals which results in the growth of monopolies. In order to
redress this problem a large number of entrepreneurs need to be developed, which
will help reduce the concentration of economic power amongst the population.
 (5) Wealth Creation and Distribution:
 It stimulates equitable redistribution of wealth and income in the interest of the
country to more people and geographic areas, thus giving benefit to larger sections
of the society. Entrepreneurial activities also generate more activities and give a
multiplier effect in the economy.
 (6) Increasing Gross National Product and Per Capita Income:
 Entrepreneurs are always on the look out for opportunities. They explore and exploit
opportunities,, encourage effective resource mobilisation of capital and skill, bring
in new products and services and develops markets for growth of the economy. In
this way, they help increasing gross national product as well as per capita income of
the people in a country. Increase in gross national product and per capita income of
the people in a country, is a sign of economic growth.
 (7) Promotes Country's Export Trade:
 Entrepreneurs help in promoting a country's export-trade, which is an important
ingredient of economic development. They produce goods and services in large
scale for the purpose earning huge amount of foreign exchange from export in order
to combat the import dues requirement. Hence import substitution and export
promotion ensure economic independence and development.
 (8) Induces Backward and Forward Linkages:
 Entrepreneurs like to work in an environment of change and try to maximise profits
by innovation. When an enterprise is established in accordance with the changing
technology, it induces backward and forward linkages which stimulate the process
of economic development in the country.
 (9) Facilitates Overall Development:
 Entrepreneurs act as catalytic agent for change which results in chain reaction. Once
an enterprise is established, the process of industrialisation is set in motion. This
unit will generate demand for various types of units required by it and there will be
so many other units which require the output of this unit. This leads to overall
development of an area due to increase in demand and setting up of more and more
units. In this way, the entrepreneurs multiply their entrepreneurial activities, thus
creating an environment of enthusiasm and conveying an impetus for overall
development of the area.
Low capital formation in underdeveloped countries