Factors of Production Notes

The Productive Mechanism

  • Determines the production of goods and services in an economy.

  • Production transforms materials; inputs are used, and outputs are obtained.

Utility

  • Want-satisfying power of a commodity.

    • Form Utility: Changing the form of a commodity (e.g., carpenter making a chair).

    • Place Utility: Changing the location of a commodity (e.g., transporting goods from Chennai to Delhi).

    • Service Utility: Performing services (e.g., doctors, teachers).

    • Time Utility: Storing goods for later use (e.g., Food Corporation of India storing grains).

Factors of Production

  • Resources used in production.

    • Primary: Land and labor.

    • Secondary: Capital and entrepreneur.

Characteristics of Factors of Production

  • Jointly used, variable proportions, physical existence, use of factor services.

  • Demand is derived, not equally mobile.

Land

  • Includes surface and natural resources.

    • Characteristics:

    • Limited supply, a gift of nature, primary factor.

    • Alternative uses, immobile, varies in fertility.

    • Law of diminishing marginal returns applies.

    • Functions:

    • Determines agricultural production and aids industrial development.

    • Supplies natural resources.

    • Importance:

    • Determines total, industrial, and agricultural production.

    • Influences economic growth and satisfies basic needs.

    • Productivity:

    • Capacity to produce a crop; affected by natural factors, land use, investment, location, and technology.

Labour

  • Human effort (physical/mental) for reward.

    • Characteristics:

    • Inseparable from the laborer, an active factor, mobile, alternative uses.

    • Supply:

    • Measured in man-days per year, influenced by population and age structure.

    • Efficiency:

    • Productive capacity; influenced by health, literacy, climate, and work environment.

    • Mobility:

    • Ability to move between places/occupations; includes geographical, occupational, and social mobility.

    • Division of Labour:

    • Increases efficiency through specialization.

Capital

  • Produced means of production.

    • Characteristics:

    • Man-made, durable, passive factor, elastic supply, mobile.

    • Capital Formation:

    • Creation of capital through savings.

    • Stages: creation of saving, mobilization of savings, investment of mobilized savings.

    • Slow Rate of Capital Formation in India:

    • Due to lack of ability/willingness to save and insufficient mobilization of savings.

Entrepreneur

  • Person bearing business risk and coordinating factors of production.

    • Qualities:

    • Courage, problem-solving ability, decision-making skills.

    • Business knowledge, skilled resource identification, market prediction.

    • Efficient organizer, leadership qualities, experience.

    • Role in Economic Development:

    • Risk-bearing, innovation, generation of employment and income.