After the analysis of the demand situation of a product, firms as economic agents face the problem of the organization of the resources to meet the possible production goals. These resources (raw materials and factor services) known as inputs are fed in at one end, and the finished goods or services known as outputs, emerge at the other end. These inputs may be regarded as being combined to produce the output or being used up (or sacrificed) in order to gain the output.
The product of one industry may be used in another industry. For example, coal is the product of a colliery, but, when it is used in a factory, it becomes a factor of production. Similarly, wheat is output for a farmer; but, when it is used to produce bread, it becomes a factor of production. Thus, a firm buys the inputs for use in its production, whereas it produces or processes the output for sale.
Each distinct input into the production process can be regarded as a factor of production. All these factors of production help in the process of production. For example, for the production of garments, piece of land is required to build a factory, where the production takes place.
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This also requires the services of labour. Capital is required to meet capital expenditure on the purchase of machines, tools, etc., and for incurring recurring operating expenditure on raw materials, fuel, power etc.
Finally, the services of entrepreneur are required to organize, supervise and coordinate the whole process of production including the services of land, labour and capital. These are (four) primary inputs in the sense that they participate in the production activity in the first instance.
A distinction is required to be made between the factors of production and the services which they render in production. When a producer hires a factor of production, it is not the factor but his services that are bought.
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The traditional four-fold classification of factors of production, viz., land, labour, capital and entrepreneur is modified by several economists. To some, organisation is not a separate factor of production, since it is only a type of labour. While some others consider only two factors of production, viz., capital and labour.
Here, capital includes land and labour includes entrepreneur also. At the extreme. Karl Marx emphasised only one factor of production, i.e., labour. In his view, land cannot produce anything by itself, unless it is used by man.
Further, capital is man-made and is the embodiment of labour. Finally, entrepreneur is not a separate factor of production; rather it is a form of labour. Therefore, all factors of production are reducible to labour.
However, it will be convenient to classify all factors of production under the four heads. It will also be useful to study the distribution of incomes as rent for land, wages of labour, interest on capital and profit to entrepreneur. These four factors of production are briefly discussed here.
1. Land:
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Marshall defines the term land as, “the whole of the materials and forces which nature gives freely for man’s aid in land and water, in air, light and heat”. The term land is used in a broader sense, which includes all raw materials or those which are free gift of nature used for the satisfaction of our wants or for the production of goods and services.
It does not simply refer to land in the ordinary sense of the term, but also resources like forests, lakes, seas, waterfalls, rainfall, mountains, climate, weather, sunshine, minerals, air, etc. Land includes not only the land used for agricultural or industrial purposes, but also all the national resources taken from above or below the soil.
Thus, land represents the sum total of natural resources available to the economy. These natural resources have value, because they are useful and these are scarce. Following are the important peculiar characteristics of land:
(a) Fixed Supply:
The supply of land is fixed, predetermined by nature. Man cannot add to it through his efforts. An individual may get more of land by paying for it, the society as a whole cannot increase its availability.
However, man may discover unknown natural resources, like mineral deposits. New uses of known resources can also be found. Multiple cropping (or rotation of crops) is another alternative.
The Dutch added some land surface by drying up sea. However, it is not an addition of land in the true sense of the word, since, the land was already there. Similar explanation can be given for the reclaimed marshy and weed infested land brought under cultivation.
(b) Price of Land:
Though land is free gift of nature with fixed and limited supply, it is not available free of cost. Market price of land comes into existence as result of economic arrangements like private ownership and inheritance. However, man might not have paid any price for the land acquired by him in the initial stages.
(c) Original and Indestructible Powers:
Land has original and indestructible properties in the sense that location and even fertility of land are given by nature and cannot be destroyed. Even when a particular area loses its fertility and productivity for some reason, man can restore or improve the productivity through manure, irrigation and drainage system or by leaving the land uncultivated for some time or otherwise. It can also be rendered fully or partially unproductive through its constant use.
(d) Immobile:
Unlike other factors of production, land is permanent and immobile. It cannot be taken to other places, resulting in wide variations in land rents at different places. Though land lacks geographical mobility, it can be put to different uses.
Different alternative crops can be grown on the same piece of land. For example, land can be used for cultivating rice, wheat or even as a building site.
(e) Heterogeneity:
Land is not homogeneous. No two pieces of land are exactly same in fertility. Some lands are fertile, while others are marshy, rocky and barren, unfit to yield any crop. Further, lands differ in situations.
Land situated in the heart of city or near the market, railway station, aerodromes etc. will have more value because of better location than sites in the suburbs.
2. Labour:
The term labour (L) may be defined as any action of mind or body, which is undertaken with a view to earn some monetary reward. In the words of Marshall, “by labour is meant the economic work of a man, whether with the hand or with the head”.
The concept of labour, however, is confined to only human effort and the work performed by animals and machines is not considered as labour.
In common parlance, labour stands for unskilled labour, but, in Economics, it stands for all labour which is used in the production of goods and services. It includes skilled and unskilled labour, manual (physical) and mental labour, technical and non-technical labour, ordinary and managerial labour, and those employed in education, Government, administration, justice, etc.
Every labour which is paid for his services is generally a productive labour. But, gamblers, thieves, speculators, professional cheats, etc. included in anti-social activities are unproductive, no matter they get money more than those, who are employed in legitimate jobs.
It is important to note that labour as an input cannot be separated from its supplier. In most of the cases, this factor is to be present and offer the service personally. It is in this sense that labour is distinct from other factors of production like land, capital and organization.
All these factors are separate from their supplier. But, labour and labour services are inseparable. Further, labour is perishable as against other factors. It cannot be stored. If a labourer does not find work on a particular day, his labour is wasted for that day.
Labour not performed is lost forever. So, its performance cannot be postponed. For this reason, bargaining power of workers is poor, and they are forced to accept low wages (minimum subsistence wages) or go without it.
Now, the bargaining power and economic condition of workers are improving by the formation of trade unions and labour laws. Social security measures have also been adopted to safeguard their interests.
Volume of labour cannot be changed in response to change in demand. Natural factors like war, epidemics, may sometimes even reduce the availability of labour. Thus, increase or decrease in volume of labour is a natural phenomenon and does not have any direct relation to its demand.
Further, supply curve of labour is backward sloping.
Workers would like to earn a certain minimum income to maintain their standard of living. If wages rise beyond their accustomed standard of living, they are tempted to enjoy more leisure, thereby causing contraction of supply of labour.
When wages fall below the level of standard of living, workers work harder and increase the number of hours they are prepared to work. For this, some non-working members of the family may take up the work to earn sufficient income to maintain the standard of living of the family.
Thus, it is clear that supply of labour may contract, when wages rise and vice- versa. In other words, changes in price of labour have reverse effect on its supply as against other factors of production.
There are a large variety of workers both skilled and unskilled depending upon their health, age, intelligence, social background, education level, experience etc. Different workers (even unskilled ones) have different productive capacities.
Further, each worker is not equally productive in different jobs. This difference is more among skilled workers for a specific job. Education, training, skill, health, climatic conditions, organizational set-up and personal qualities affect the efficiency of labour, while his intensity is determined by the willingness of labourer to work without wasting time and effort. Willingness of worker depends, upon-several factors like general, social atmosphere, loyalty towards job, wage rate and other factors.
Labour exhibits certain peculiarities and is different from other factors. Land and capital cannot produce anything without the services of labour. Further, since capital can be invested in labour, the latter may be called as human capital.
It is mobile and can be considered not only a means but also an end, since production is carried on for the sake of human beings. Finally, due to the personal nature of labour, the economic considerations alone are not sufficient. The conditions and surroundings under which the worker works are also important and affect the productivity of the labour.
3. Capital:
Labour and land are the two primary factors of productions to facilitate production. Labour cannot work, unless there is land to work upon. Similarly, land cannot produce anything by itself, but, requires labour to act on it.
These two factors are used to produce capital (K), which is a highly mobile factor of production. Thus, capital is produced by man (labourer) working on nature (land). It is a man made productive resource. In the words of Bohm Bawerk, capital is “the produced means of production”.
Thomas defines it as “wealth of individuals and communities other than land which is used to assist in the production of further wealth”. According to Marshall, “capital consists of those kinds of wealth, other than free gifts of nature, which yield income”.
It is that part of wealth, which is used for further production of wealth. It appears in various forms like plant and machinery, tools, buildings, roads, dams, bridges, means of transportation and communication, etc. These capital goods have limited life.
However, supply of capital is not fixed in short period. It can be varied. As capital is the result of human labour diverted to the production of goods and services meant for further production, instead of goods meant for consumption, there is no limit to which it can be accumulated.
This process of addition of capital stock is called capital formation. Capital formation plays a vital role in the process of economic development of a country. Large investments in capital project are required for the growth of an economy.
As in the process of production, capital stock is reduced, capital accumulation during a given period must exceed the amount used in production during that period to raise the output, income and employment in a country. Further, process of development requires training and skill of labour to improve its productivity.
Thus, capital on one hand makes available means of production for production of goods in future. On the other hand, it provides job opportunities and improves the quality of labour. Finally, capital makes available resources to producer to make payments for labour, raw materials, machinery, transport and other selling expenses including advertisement cost. With the industrial revolution and replacement of simple primitive techniques of production by expensive ones, this factor has become relatively more important.
4. Entrepreneur:
It is that factor of production, which organizes plans and brings together all the factors of production. Entrepreneur is the employer of the factors of production. He produces goods and services after supervising and coordinating the activities of the various factors of production. He also makes payments to the factors for their contribution in the production process.
The entrepreneur is distinct from other factors of production in the sense that he is not employed by anyone. He gets profit (if any) for managing the business in an atmosphere of business risk and uncertainty.
His profit reward is residual, while he has to make fixed contractual payments to other factors of production. He may even suffer loss (negative profit), in case these contractual payments exceed the revenue from the sales of goods and services.
The entrepreneur has to take all business decisions including line as well as scale of production, selection of plant site, optimum combination of factors, market research, advertisement outlay, demand forecasting, etc.
In short, he is the one who must take all decisions regarding the organisation, the running and the management of the business. He also represents the business before the Government or with other enterprises.
The entrepreneur is often loosely identified with the owner of a business, a speculator, an inventor or innovator and an organiser of the business.
However, he should better be identified with organiser, who does not simply bears the risk, but introduces innovations also. Further, he not only invents, but goes much further in exploiting the invention commercially.
The entrepreneur plays a vital role in production in the modern era. Those days have gone, when the production was simple and was carried out in small work shops or even in houses. On account of small scale production, the worker used to supply capital including tools and equipment himself, owned his land or house to carry on production and planned all the operations of purchase of raw materials and sale of goods.
In modern times, the production process has become very complex and the factors of production are owned separately. It, therefore, becomes necessary for someone with vision to act as a boss and decide as to how the business should run.
Such person, known as entrepreneur takes all major decisions regarding the organization and management of the business. He is looked upon as an indispensable factor of production.
The importance of entrepreneurship is increasing day by day because the inherent elements of risks have considerably gone up in modern complicated production. The greater is the element of risk, the greater is the need for entrepreneur of calibre and competence.
The success of any business depends on the efficiency of the entrepreneur, that is, the capacity to produce maximum at the minimum cost. Following are the requisite personnel qualities in an efficient entrepreneur:
(a) Foresightedness:
He should be able to forecast the demand of the product accurately.
(b) Self Confidence:
The entrepreneur should not lose confidence in difficult situations like labour troubles, disputes, depressions, stiff competition, Government policy, power break down, etc. He should rather face such situations boldly and with confidence.
(c) Knowledge of Business:
He should be familiar with the intricacies of the business and psychology of the workers to handle the situation properly and establish industrial peace.
(d) Leadership:
Being captain of the business, the entrepreneur must have the quality of leadership and the power to take quick decisions.