Economic Analysis

Module 3. Theory of production

Lesson 14
BASIC FACTORS OF PRODUCTION AND THEIR ROLE: LAND, LABOUR AND CAPITAL

14.1 Introduction

Milk producers rear milch animals. Milk producers obtain raw milk from milch animals. This milk is processed and made suitable for human consumption by the process of pasteurization. Various products are also prepared from milk. e.g. milk powder. This creates form utility. These products are then transported to urban areas to be sold. This creates place utility. If this products are stored and used in scarcity, it creates time utility e.g. milk powder manufactured from milk and then transported to Himalaya regions to be used by our defence personnel illustrates the form, place and time utility concept of production during which wealth is created. Production is thus defined as the creation or addition of value or of wealth.

14.2 Factors of Production

Through production wealth is created but this requires use of several factors. For example to obtain milk products, milk is required. Milk is obtained from milch animals which require land for grazing. Machines, manpower and money are required in an organizational set up of dairy plant.

14.3 Land

In Agricultural sciences, the term land means soil. In geography land means surface of earth. In Economics the term land has a very broad meaning. It includes all free gifts of nature available to mankind viz., air, water and land. It includes all types of land surfaces such as mountains, valley, plains, forests etc. It includes all types of water resources such as rivers, oceans, etc. Thus the term land includes all natural resources on, above and below the earth's surface.

14.3.1 Economic significance of land

Land is the most important basic factor of production. Type of land decides the prosperity of a country to a large extent. If a country has rich natural resources e.g. fertile land for different types of crop production, mines to obtain minerals, water bodies and water falls to meet demand of water and generation of electricity than by efforts of citizens of that country, it can easily become rich and prosperous. On the other hand if a country does not have rich natural resources then even with efforts of citizens, it will be difficult to be rich and prosperous.

14.3.2 Characteristics of land

1. Free gift of nature: Land is a free gift nature to mankind. Man has not to pay anything but has to use it wisely. Unwise use of land by mankind has caused many problems.

2. Fixed quantity: The total area of land on earth is limited. Due to increased population pressure, mankind tries to increase land surface by reclaiming it from water bodies e.g. in the form of river front. Due to fixed quantity and greater demand by mankind, its economic value goes on increasing day by day.

3. Stationary and Permanent: Land cannot be moved from one place to another by any natural factors of production. It cannot be destroyed by any natural or manmade forces but its form can be changed e.g. floods, earthquakes, and destruction by atom bomb.

4. Diversity: Land is of varied nature. All its different forms are providing economic benefits. e.g. forests provide wood and helpful in rainfall, plains are useful for cultivation of crops, land with different soil characteristics help in growing variety of crops.

14.4 Labour

Labour is defined as any mental or physical exertion undertaken partly or wholly with a view to earning some good other than pleasure derived directly from the work (Marshall).

In ordinary language, the word labour is associated with manual work only, those done by unskilled workmen. But in Economics, the word labour includes mental labour also along with manual labour. Thus the work done by any person whether skilled or unsealed is considered as labour as far as it is done to get money. e.g. work done by professor, engineers, doctor, lawyers, craftsmen, etc.

14.4.1 Characteristics of labour

The important characteristics of labour are as follows are as follows

1. Labour and labourer are associated. To get the work done, labourer has to physically execute the work e.g. To teach a lesson, professor has to be present in the class, To attend a patient doctor has to be there etc.

2. It is not possible to purchase labour. It is possible to purchase services of labour. If a person is not willing to sell his service then it is not possible to make him slave.

3. Labour is the most perishable resource. If no productive work is carried out on a particular day then it is lost. It is not possible to have fruitful use of foregone time in which labour is wasted.

4. In India due to very high population and high unemployment scenario, labour has less bargaining power.

5. Labour (mankind) is a social animal. It is possible to motivate the labour and get more output and vice versa.

6. It is not possible to immediately adjust to the demand.

7. Labours vary in their efficiency.

14.5 Capital

Goods used in production are called capital. Portion of man's wealth excluding land which yields an income or which aids in production of more wealth is capital. Capital is produced means of production. This definition excludes land and labour from capital as they are primary or original factors of production. Capital is also defined as instrument of production made by man. From the above definitions it can be said that all physical goods which are produced for use in future production is capital. Machines, tools and instruments, factories, irrigation projects, transport equipments, raw materials etc constitute capital. Money securities and shares are not considered as capital.

14.5.1 Features of capital

The important features of capital are as mentioned below

1. It is manmade depending upon requirement and based upon availability of other resources it is possible to increase stock of capital.

2. It is involved in all phases of production cycle. Some kind of raw materials which should be used as input to produce an output (another form and capital) through use of a (Capital Equipment) e.g. stainless steel will be used in factories to produce milk pump to be used in dairy plants.

3. Based upon usage pattern, capital is categorized as fixed and working capital. Fixed capital constitutes durable use producer goods used in production repeatedly till they wear out e.g. different machineries. Working capital is single use producer goods, e.g. different raw materials.

4. Capital and wealth are not same. All capital is wealth but all wealth is not capital. A private air craft used by rich businessmen used for enjoyment is wealth for him but not capital.

It plays important role in economic development. It is essential for production and increasing productivity. It creates employment opportunities during its production and its use for producing other items.