What is Production Function ?

Factors of production means inputs and finished goods means output. Input decides the quantity of output
i.e. output depends upon input. Input is the starting point and output is the end point of production process
and such input-output relationship is called as "Production Function".
All factors of production like land, labour, capital and entrepreneur are required altogether at a time to
produce a commodity. In economics, production means creation or an addition of utility.
Factors of production refers to inputs required for conducting production. Input is the starting point of every
production activity.
According to Prof. Benham, "Anything that contributes towards output is a factor of production."
Mere existence of anything doesn't make it a factor of production but its contribution in production process is
a necessary condition. Dr. Alfred Marshall described factors of production as "Agents of Production".
Cooperation among factors is essential to produce anything because production is not a job of single factor.
Four Factors of Production In Economics - Chart
Following chart provides brief tabulated information on 4 factors of production.

4 FACTORS OF PRODUCTION
1. Land is a Natural & Primary Factor of
Production
Land is not created by mankind but it is a gift of
nature. So, it is called as natural factor of
production. It is also called as original or primary
factor of production. Normally, land means
surface of earth. But in economics, land has a
wider meaning. Take a good look at the following
picture :Land includes earth's surface and resources
above and below the surface of the earth. It
includes following natural resources :On the surface (e.g. soil, agricultural land, etc.)
Below the surface (e.g. mineral resources, rocks,
ground water, etc.)
Above the surface (e.g. climate, rain, space
monitoring, etc.)
Peculiarities / Characterisitcs / Features of Land
1. Land is a free gift of nature
Land is a free gift of nature to mankind. It is not a
man-made factor but is a natural factor.
2. Land is a primary factor of production
Though all factors are required for production,
land puts foundation for production process.
Starting point of production process is an
acquisition of land. So, it is a primary factor.
3. Land has perfectly inelastic supply

From society's point of view, supply of land is

perfectly inelastic i.e. fixed in quantity. Neither it
can be increased nor decreased. Simply, you can
not change size of the earth. But from individual
point of view, its supply is relatively elastic.
4. Land has gradability
Land varies from region to region on the basis of
fertility. Some land are more fertile and some are
not at all. So, fertility wise, grading of land is
possible. So, in this way, land has gradability.
5. Land is a passive factor
Land itself doesn't produce anything alone. It is a
passive factor. It needs help of Labour, Capital,
Entrepreneur, etc. Like labour and entrepreneur, it
doesn't work on its own initiative. So it is a
passive factor.
6. Land may have diminishing returns
Here, return means quantity of crops. By using
fertility of land with the help of capital and labour
continuously, returns gets diminished because of
reduction in fertility.
7. Land has a derived demand
Demand for agricultural goods is a direct demand
and for producing such goods, land is indirectly

demanded. So, as a factor, land has a derived

demand from consumer's point of view.

Labour can not be separated from labourer.

Worker sells their service and doesn't sell
themselves.

8. Land has no social cost

2. Labour is a perishable factor
Land is a gift of nature to society. It is already in
existence. Land is no created by society by
putting any efforts and paying any price. So, for
society, supply price of land is zero.
But, because for the purchase of land or for its
improvement, individual has to pay certain price,
so its supply price for individual is not zero.
9. Land is a indestructible factor

Labour can not be stored. Once the labour is lost,

it can not be made up. Unemployed workers can
not store their labour for future employment.
3. Cost of
determined

producing

labour

cannot

be

Land is durable and not perishable. It has a long

life. No one can destroy the land. The power of
land is permanent and indestructible. Its fertility
can be destroyed as well as restored by human
efforts.

It is easy to calculate production cost of a

commodity produced in an industry. But cost of
producing a labour is a vague concept because it
includes expenses incurred by parents on
education of their children and other expenses
incurred on them right from their birth date. It is
impossible to estimate all such casts accurately.

10. Land is perfectly immobile

4. Labour is an active factor of production

Mobility means ability to move. Movement of land

from one place to another is impossible. Thus,
physically, land is perfectly immobile. But it has
certain occupational mobility because it can be
used for variety of occupations, like agricultural
use or for construction of houses.

Other factors like land, capital are passive, but

labour is an active factor of production. Being a
human being, this factor has its own feelings, likes
and dislikes, thinking power, etc. We can achieve
better quality and level of production, if land and
capital are employed properly in close association
with Labour. So without labour, we cannot
imagine the smooth conduct of production.

11. Land has a site or location value

Every piece of land has its certain site or location
value. Such value depends upon quality of its
location. Land near to sources of raw materials
and other infrastructure facilities always enjoy
high site value. Here accessibility of land plays an
important role.

5. Labour is a heterogeneous factor

12. Land earns rent as a reward for its use

6. Labour has imperfect mobility

Rent is a reward for the use of land. Classical

economists like Ricardo connected rent with
fertility of land whereas modern economists like
Marshall and Javons stated that land earns rent
because of its scarcity.

Labour doesn't move easily from one occupation

to another because of several factors like family
and cultural background, limited educational and
technical skills, lifestyle, housing and transport
problems, language barrier, adaptability to new
environments, etc.

What is Labour and Labourer ? Meaning

Usually, the term 'Labour' is used for 'worker'.
But, technically, it is not correct. Labour and
Labourer (worker) are two different things.
Labour is an ability to work. Labour is a broad
concept because it includes both physical and
mental labour (as per above picture). Labour is a
primary or human factor of production. It
indicates human resource.
Labourer is a person who owns labour. So labourer
means worker. It is a person engaged in some
work.
Peculiarities / Features / Characteristics of
Labour
1. Labour is inseparable from labourer

No two persons possess the same quality of

labour. Skills and efficiency differs from person to
person. So, some workers are more efficient than
others in the same job.

7. Labour supply is inelastic in general

Supply of labour depends upon many factors like
size of population, age and sex composition,
desire to work, quality of education, attitude
towards work, etc. Thus, supply cannot be
changed easily according to changes in demand.
Hence, in general, labour supply is inelastic. But
for a particular industry, it may be relatively
elastic.
8. Labour is a human capital
Society makes investment in labour in the forms
of education, health, training, etc. This improves
efficiency of labour. So, it is a human capital.

9. Trade unionism is a factor of Labour

Workers collectively form their organization which
is known as trade union. With this, they bargain
with their employers and there by secure higher
wages and better working conditions. Such trade
unionism is not possible in other factors of
production like land, else works only in case of
labour (labourer).
10. Labour has a derived demand
Like other factors of production, labour has a
derived / indirect demand. It contributes to
production process.
11. Labour is a Mean as well as an End
Labour is a mean of production in factory. But
outside the factory premises worker may be a
consumer of that product. So, he might be an end
user of that commodity.
What is Capital? Meaning
Different subjects like Book-keeping, organization
of commerce (O.C) and secretarial practice (S.P)
in commerce, economics, etc., indicate different
meaning of the term Capital.
In book-keeping, capital means amount invested
by businessman in the business.
In commerce subjects like O.C and S.P, capital
means finance or company's capital.
But, in economics, capital is that part of wealth
which is used for production.
But here consider meaning of term capital from
economic point of view.
Relations of Capital
The word Capital is related with the following
three terms, viz.,
Wealth,
Money, and
Income.
The relation of capital with wealth, money and
income is explained below:1. Relation with Wealth:Capital is that part of wealth which is used for
production. So, wealth is a broad concept and
capital is a narrowed concept.
Relation of Capital and Wealth is explained with
the help of following picture.
If a commodity is having features like scarcity,
utility, externality and transferability, it becomes
wealth. A motor car has all above features, so it is
a wealth. (As per picture 'A' in above photo).
When wealth is used in production process, it
becomes capital. If that car is used for taxi (cab)
business, it becomes capital. (As per picture 'B' in
above photo). Therefore, any commodity as a
wealth becomes the capital if it is used for
production.
Thus, all capital is wealth but all wealth is not
capital.

2. Relation with Money:The relation between Capital and Money is shown

in the following picture.
Normally, capital means investment of money in
business. But in economics money becomes
capital only when it is used to purchase real
capital goods like plant, machinery, etc. When
money is used to purchase capital goods, it
becomes Money Capital. Please see the picture
given above.
But money in the hands of consumers to buy
consumer goods or money hoarded doesn't
constitute capital. Money by itself is not a factor
of production, but when it acquires stock of real
capital goods, it becomes a factor of production.
For production we need real capital and money
capital but money capital acquires real capital.
3. Relation with Income:Capital generates income. So, capital is a source
and income is a result. E.g. refrigerator is a capital
for a ice-cream parlour owner. But, profits which
he gets out of his business is his income.
So, Capital is a FUND concept and Income is a
FLOW concept.

FEATURES OF CAPITAL

The characteristics or features of capital are:1.Man-made Factor : Capital is not a gift of nature.
So it is not a primary or natural factor, it is made
by man in capital goods industry. It is secondary
as well as an artificial factor of production.
2.Productive Factor : Capital helps in increasing
level of productivity and speed of production.
3.Elastic Supply : Supply of capital depends upon
capital formation process. Capital formation
depends upon savings and investment. By
accelerating capital formation, capital supply can
be increased. But it is a long term process.
4.Durable : Capital is not perishable like labour. It
has a long life subject to periodical depreciation.
5.Easy Mobility : Movement of capital from one
place to another is easily possible.
6.Is a Wealth : Since capital has all features of
wealth viz. utility, scarcity, transferability and
externality, capital is a wealth but wealth doesn't
necessarily become capital.
7.Derived demand : As a factor of production,
capital has a derived demand to produce finished
goods which have a direct demand. e.g. demand
for raw cotton is derived from demand for cotton
cloth.
8.Round about production : Capital goods doesn't
satisfy our wants directly. But resources should be
diverted towards production of capital goods first.
And thereafter such produced mean can be used
to produce consumer goods having direct
demand.

9.Social Cost : Resources have alternative uses.

Either they can be put to production of capital
goods or consumer goods. When resources are
used for producing capital goods, it means society
has sacrificed enjoyment of consumer goods. This
is called social cost.
Types of Capital
The forms, classification or types of capital are:1.Fixed capital : It refers to durable capital goods
which are used in production again and again till
they wear out. Machinery, tools, means of
transport, factory building, etc are fixed capital.
Fixed capital does not mean fixed in location.
Since the money invested in such capital goods is
fixed for a long period, it is called Fixed Capital.
2.Working capital : Working capital or variable
capital is referred to the single use produced
goods like raw materials. They are used directly
and only once in production. They get converted
into finished goods. Money spend on them is fully
recovered when goods made out of them are sold
in the market.
3.Circulating capital : It is referred to the money
capital used in purchasing raw materials. Usually
the term working capital and circulating capital
are used synonymously.
4.Sunk capital : Capital goods which have only a
specific use in producing a particular commodity
are called Sunk capital. E.g. A textile weaving
machine can be used only in textile mill. It cannot
be used elsewhere. It is sunk capital.

9.Social capital : All the assets owned by a

community as a whole in the form of noncommercial assets are called social capital e.g.
roads, public parks, hospitals, etc.
10.National capital : Capital owned by the whole
nation is called national capital. It comprises
private as well as public capital. National capital is
that part of national wealth which is employed in
the reproduction of additional wealth.
11.International capital : Assets owned by
international organizations like UN, WTO, World
Bank, etc., constitutes an International Capital.
What is Entrepreneur? Meaning
The term 'Entrepreneur' has been derived from a
French word 'Entreprendre' meaning to undertake
certain activities. Normally, entrepreneur has to
perform two types of functions which are
explained here with the help of pictures given
below.
Factors of production viz. land, labour and capital
are scattered at different places. All these factors
have to be assembled together. This work is done
by enterprise through entrepreneur. This is an
'Organization Function'. Organization function is
the work of bringing the required factors together
and making them work harmoniously.
Entrepreneur has to bear risks and uncertainties.
For facing uncertainties he may get profit or may
incur loss. This is the 'Risk Bearing Function' and
entrepreneur is the risk bearer.
Qualities / Skills of an Entrepreneur

5.Floating capital : Capital goods which are

capable of having some alternative uses are
called floating capital. For e.g. electricity, fuel,
transport vehicles, etc are the floating capital
which can be used anywhere.
6.Money capital : Money capital means the money
funds available with the enterprise for purchasing
various types of capital goods, raw material or for
construction of factory building, etc. it is also
called liquid capital. At the beginning the money
capital is required for two purposes one for
acquiring fixed assets i.e. fixed capital goods and
another for purchasing raw materials, payment of
wages and meeting certain current expenses i.e.
working capital.
7.Real capital : On the other hand, real capital is
referred to the capital goods other than money
such as machinery, factory buildings, semifinished
goods,
raw
materials,
transport
equipments, etc.
8.Private capital : All the physical assets (other
than land), as well as investments, which bring
income to an individual are called private capital.

To be a successful and ideal entrepreneur, one

should have certain qualities or skills as given
below :Ability to organize : He should be able to organize
various factors effectively. He has to understand
all the aspects of the business.
Professional approach : He should be objective
and professional in approach.
Risk bearer : He should be risk taker. He should be
ready to bear risk and uncertainties.
Innovative : Organiser should be innovative. He
should adopt modern techniques of production.
He should not be reluctant to changes.
Decision Making : One has to take right decision
at a right time by showing his promptness. Quick
decisions are expected but hasty decisions
shouldn't be taken. Delay in decisions may
increase cost of project and reduce the profits.
Negotiation skills : Businessman regularly comes
into contact with various persons like consumers,
workers, government officials, etc. so he should
communicate tactfully.
Functions of entreprenuer
Entrepreneur is a central point to process of
production and all other factors like capital, land,

labour cluster around him. He performs following

functions.
1. Entrepreneur initiates the business activity
He has to start the business activity by preparing
a proper plan. The plan should deal with the type
of goods or service to be produced, sources of raw
material and credit, type of technology to be
used, the markets where the products can be
sold, etc. The plan should be detailed one
covering all the aspects of the business.
2. Entrepreneur
production

organises

the

factors

of

has to bear risks and uncertainties while risks are

insurable, uncertainties cannot be insured. E.g.
risk like fire, theft, etc. can be insured.
Uncertainties like changes in tastes, fashions,
cannot
be
insured.
While
facing
these
uncertainties entrepreneur may get profit or may
incur loss. Thus, risk and uncertainty bearing is
one of the unique function of an entrepreneur.
Thus the entrepreneur is the pivot around which
all the activities of the firm revolve around. He is
the one who gives direction to the business firms
& ensures its effective operation.
Features of Entrepreneurship

The entrepreneur has to collect all the other

factors of production and combine them in the
right proportion.

The entrepreneur as an organizer of the process

of production is the fore-runner of economic
development of a country.

3. Entrepreneur is a decision maker

1. Scare human resource
Business involves variety of decisions to be taken.
The entrepreneur has to decide about the nature
of
product,
technology,
price
policy,
advertisement strategy, employment of labour,
etc. A proper strategy has to be adopted by him
to take the right decision.

Entrepreneurship is a very scarce human factor as

it involves specific talent, organizational capacity,
innovative sprit and boldness to bear risk which is
not found in every person. In developing countries
like India lack of entrepreneurship is a major
impediment to development.

4. Entrepreneur co-ordinate things effectively

2. Heterogeneous factor
A business firm consists of a number of
departments. He has to co-ordinate various units
effectively by having proper communication
channels and supervision.
5. Entrepreneur tries to introduce innovations
According to Prof. Schumpeter, the true function
of an entrepreneur is introducing innovations.
Innovations imply introduction of a new product,
discovering a new product, introduction of a new
technology or new method of production etc.
Innovation involves risk. The entrepreneur may
get profit or may incur loss. Hence, few
entrepreneurs try to introduce innovations. By
innovating, they contribute to technological
process of the economy and accelerate the
growth and development.
6. Entrepreneur handles budget of his business
The entire budgeting process is the responsibility
of the entrepreneur. He has to mobilize resources
for the implementation of the business plan. All
other factors have to be paid contractual
payments. He gets the residual income, he has to
make provision for future investments for
expansion and diversification. He has to maintain
a balance between income and expenditure.
7. Entrepreneur bears risk and uncertainty
This function distinguishes the entrepreneur from
other functions while other factors need not
bother about risk and uncertainties, entrepreneur

Entrepreneurship is a heterogeneous factor of

production because efficiency, talents, organizing
skills, ability to bear risk, foresights and
innovating capacities, etc. vary from entrepreneur
to entrepreneur. The nature of enterprise varies
with various forms of business organizations like
sole trading, partnership, co-operatives, Joint
Stock Company and public undertakings. In a
small business, the same person may work as an
entrepreneur, manager and capitalist.
3. Indispensable factor
In modern business entrepreneur is a very
important factor of production as he organizes
production of goods & services by coordinating
the other factors in an optimum way. He is an
organiser & owner of the firm. Production is
impossible in his absence.
4. Intangible factor
Entrepreneurship is an abstract phenomenon. It is
intangible. Entrepreneurial efforts cannot be
measured in quantitative terms while we can
measure in terms of hours of work and number of
days. We can calculate the number of individual
workers and their contribution to the firm but it is
not possible to measure entrepreneurship as the
firm itself is the enterprise.
5. Highly mobile

Of all factors entrepreneur possess a higher

degree of mobility as he can easily move from
one industry to another or from one region to
another. An entrepreneur's ability to move from
one industry to another depends upon his
knowledge, experience and specialization.

entrepreneurship can be bought and sold.

Transaction is not possible in case of enterprise.
We cannot derive the demand and supply curves
in case of entrepreneur. Hence, the Demand and
Supply Theory of value cannot be applied to the
factor enterprise or organization to determine its
price.

6. Cannot be Bought & Sold

7. Residual reward
Land labour and capital can be bought and sold in
factor markets but it is not possible to deal with
entrepreneurs in a factor market. Since enterprise
is an intangible factor, it cannot be bought and
sold. Hence, like land, labour and capital market
there is no entrepreneurial market where

Entrepreneurship is a reward in terms of profit

which is a residual reward, i.e. an income which is
left after meeting all business expenses from the
total sales revenue.

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