Factors of production have been classified into four categories: land, labour, capital and entrepreneurship. Land in economics means all the natural resources available from air, water, from above the land surface and below it which can be used for production. Similarly, labour does not only mean physical exertion, but all types of work, physical or mental, done by man for a monetary reward. By capital, it is the whole stock of physical capital goods consisting of machines, tools, implements, raw materials etc. which is used for the production of further goods. The role of entrepreneurship is to bring the above three factors together, assigning work to each and bear the risk and uncertainty of production.
Table of Contents
Land
The term “land” has been given a special meaning in economics. In the words of Marshall, land means “the materials and the forces which nature gives freely for man’s aid, in land and water, in air and light and heat.” Land stands for all natural resources which yield an income or which have exchange value. “It represents those natural resources which are useful and scarce, actually or potentially.” Land is the chief agent in the production of wage goods, such as foodgrains, cloth and sugar. Every commodity that we can use, directly or indirectly, be traced ultimately to land. “Earth’s surface is a primary condition of anything that a man can do, it gives him room for his action.” The quantity and quality of natural resources play a vital role in the economic development of a country. Important natural resources are those of agricultural land, minerals and oil resources, water, forests, climate, etc. It is not also about the availability of resources but it is about the productivity of those resources.
Land as Renewable and Non – Renewable Resources
Natural resources are often divided into two categories i.e., non – renewable and renewable resource. The exhaustible resources are those natural resources which when used once cannot be renewed. Natural resources such as mineral deposits of iron ore, copper, deposits of coal and petroleum get depleted as they are used by the economy. Their stocks are limited and cannot be renewed. On the other hand, renewable resources are those which go on being used again and again and year after year for production. The productivity of land can be maintained but it can be significantly improved by human efforts. Thus, land in the sense of agricultural soil is renewable resource. Water resources, fisheries and forest resources are other examples of renewable resources: if some part of the forest resources is used, they can be replanted and their stock can be increased in the long run.
Inelastic Supply of Land
Land is a free gift from nature and its quantity is fixed by nature. Therefor, more land cannot be produced in response to greater demand for it. The supply of land to the entire economy is not dependent on the price i.e., rent for its use. So, from the standpoint of the whole economy, the supply land is perfectly inelastic. Since it is a free gift from nature and not a produced factor, cost of production has no relevance for supply. It is also noted that the supply of land to a single use or a particular industry is not perfectly inelastic. The supply of land to a particular use or industry can be increased by the shifting of land from other uses or industries.
Capital: Physical and Human
The term capital is used in economics in various senses. In economics, sometimes capital is used in terms of money. It is evident that money is used to purchase various factors such as raw materials, machinery, labour which is helpful for production of goods, but money itself does not directly help in the production of goods. Money, which is available for investment and productive purposes has been called money capital or financial capital, but the real capital consists of machinery, raw materials, factories etc., which directly assist in the production of goods. Capital can also be defined as “produced means of production”. This definition distinguishes from both land and labour because both land and labour are not produced factors. Land and labour are often considered as primary or original factors of production. But capital is not a primary and original factor, it is a produced factor of production. Capital has been produced by man by working with nature. So, capital may will be defined as man-made instrument of production. Capital thus consists of those physical goods which are produced for use in future production. Machines, tools and instruments, factories, canals, dams, transport equipment, stocks of raw materials are some of the examples of capital.
Fixed Capital and Working Capital
Fixed Capital are durable – use producer goods which are used in production again and again till they wear out. Machinery, tools, railways, factories etc., are all fixed capital. Fixed capital does not mean fixed in location. Capital like all the examples mentioned above are called fixed because if money spent upon these durable goods, remains fixed for a long period in contrast with the money spend on purchasing raw materials which is released as soon as goods made with them are sold.
Working Capital, on the other hand, are the single – use producers’ good like raw materials, goods in process and fuel. They are used up in a single act of production.
Human Capital
Human capital is the stock of people equipped with education, skills, health, etc. The rate of growth achieved in the developed countries cannot be wholly explained by the increases in physical capital and advances in technology. A good part of economic growth has occurred due to the accumulation of human capital. Human capital formulation is as important in increasing production and productivity as the physical capital formulation. An educated, trained and skilled man is much more productive that an uneducated, untrained and unskilled. Similarly, a person with good health contributes to production to a greater degree than the person with frail and poor health. Since investment in education, skill and health adds greatly to the productivity of men, investment in human capital has also been called investment in men, or investment in human beings.
Similar to physical capital, expenditure on education also represents investment in capital which raises productivity in the future. Investment in education is tied to specific human being and therefore it is called human capital. According to Mankiw, “Like all forms of capital, education represents an expenditure of resources at one point in time to raise productivity in the future. But unlike an investment in other forms of capital investment in education is tied to a specific person and this linkage is what makes it human capital.”
Role of Capital
Capital plays a vital role in the modern productive system. Production without capital is hard for us to imagine. Nature cannot furnish goods and materials to man unless he has the tools and machinery for mining, farming, forestry, fishing, etc. If a man has to work with his hands on barren soil, productivity would be very low indeed. More goods can be produced with the aid of capital. Capital adds greatly to the productivity of workers and hence of the economy as a whole. Capital goods are man – made instruments of production and increase the productive capacity of the economy. So, accumulation of capital goods every year greatly increases the capacity to produce goods and is a crucial factor in bringing about economic growth. Capital accumulation makes possible the use of indirect methods of production which greatly increase the productivity of the workers. Under these indirect methods of production, workers instead of working with bare hands, work, with the aid of more productive tools, instruments and machinery. Capital accumulation makes the technological progress of the economy possible.
Different technologies need different types of capital goods. Therefore, when new, superior and better technology is discovered, its use can be made for production only if that technology is embodied in new capital goods, i.e., if capital goods according to that technology are made. An important economic role of capital formulation is the creation of employment opportunities in the country. Capital formation creates employment at two stages. First, when the capital is produced, some workers have to be employed to make capital like machinery, factories, dams, irrigation works etc. Secondly, more men have to be employed when capital has to be used for producing further goods.
Labour
Labour refers to the human aspect of production. For producing paddy, the farmer and his family work on the field. The fisherman has to go out to sea on his boat to harvest and bring back fish. The worker in the factory operates the machinery where cars, computer, pens etc. is produced. In doing so, labour creates goods and services that are consumed or used by others. In the process, labour gains income, which in turn is used for consumption. Labour must always be paid. In agriculture, we have noticed that the family members of the farmer work on the field and they may not be paid by him, but while calculating the cost of production of farmer, even that family labour is given a value and accounted for. Free service to society, however, is not considered ‘labour’. If you teach economically backward children during your free time and do not seek remuneration for it, it is not considered ‘labour’.
Following are the characteristics of Labour:
1. Labour cannot be separated from the labourer himself.
2. The labourer does not sell himself; he sells only his labour
3. Labour is a perishable factor and it is not possible to store it for furture use.
4. Labour lacks mobility; as they are human beings with feelings and attachment with the place he is presently residing and with the friends and relatives who live there. So, it is difficult for a labour to leave and shift to a new place.
5. Supply of labouris elastic but it takes time to increase its overall supply by explaining population and providing them suitable training and skills required.
6. Efficiency of labour varies a good deal; i.e., some labours are more efficient than others.
Division of Labour
Efficiency of labour depends on the division of labour and it increases the productivity of labour. Division of labour is an important feature of modern industrial organization. Division of labour may be simple of complex. Simple division of labour refers to the production of a single commodity by a person. The old village society composed of farmers who produced agricultural goods, weavers who made cloth, cobblers who made and repaired shoes, etc., but in modern days division of labour is of complex type. It is the complex division of labour which has increased so greatly the productivity of the modern productive system. Complex division of labour means that the making of an article is split up into several processes and each process is carried out by a separate worker or a separate group of workers. In the modern tailoring shops, making a shirt is broken up into different processes. Some workers only do the job of “cutting”, some others only do the work of “sewing”, and still a separate group of workers puts buttons on it, etc. this is complex division of labour in the making of shirts.
Advantages of Division of Labour
Following are the advantages of division of labour:
1. Brings about increase in productivity
2. Ensures Right Man in the Right Place
3. Promotes Dexterity and Skill of the Workers
4. Inventions are Facilitated with Division of Labour
5. Saving in Time
6. Economy in the Use of Tools
7. Use of Machinery Encouraged
8. Make Cheaper Goods Available
9. Rise of Entrepreneurs
Entrepreneur
Entrepreneurs are the catalyst in the production process. It is what puts everything in place. An assembly line in a car manufacturing unit needs to be arranged in a certain way so that the parts of the car can be properly assembled by the properly trained labour at every step. This has to be done in such a way that at the end of the assembly line, the complete brand-new car rolls out. All these steps require planning and decision making. Decision has to be taken on how the assembly line has to be asked to be there, and they must be directed to work in a particular way and properly supervised. Somebody has to do the planning and execution of all these. He or she must coordinate the functions, make decisions and take responsibilities of the entire production process. That somebody is the entrepreneur or the organization. The main function of the entrepreneurs is to control and coordinate all the other factors of production. They must also be able to take the risks associated with production process. The farmer knows that crops may fail, the fisherman is aware that he may sometimes not get any catch. As an entrepreneur he or she takes his decisions, fully aware of the risks associated with the production process. You will now ask how this is different from the labour. Labour does not take any risk. He works, does what he has to do or is asked to do and at the end of the day or month gets paid for what he does. The entrepreneurs are essentially a risk taker. The labour is an employee while the entrepreneur is the employer. All the decision making is done by the entrepreneur, while the labour is not involved in the decision-making process. Following are the important functions of entrepreneurs:
1. Initiating a Business Enterprise and Bringing About Resource Co-ordination
2. Risk Taking and Uncertainty Bearing
3. Introduces Innovations