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.

8. Land has no social cost

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

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.

10. Land is perfectly immobile

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.

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.

12. Land earns rent as a reward for its use

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.

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

Labour can not be separated from labourer. Worker sells their service and doesn't sell themselves.

2. Labour is a perishable 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 producing a labour cannot be determined

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.

4. Labour is an active factor of production

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.

5. Labour is a heterogeneous factor

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.

6. Labour has imperfect mobility

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.

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, andIncome.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 CAPITALThe 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.

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, semi-finished 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.

9.Social capital : All the assets owned by a community as a whole in the form of non-commercial 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

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 entreprenuerEntrepreneur 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 organises the factors of production

The entrepreneur has to collect all the other factors of production and combine them in the right proportion.

3. Entrepreneur is a decision maker

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.

4. Entrepreneur co-ordinate things effectively

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 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 as an organizer of the process of production is the fore-runner of economic development of a country.

1. Scare human resource

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.

2. Heterogeneous factor

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.

6. Cannot be Bought & Sold

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 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.

7. Residual reward

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.http://kalyan-city.blogspot.com