FACTORS OF PRODUCTION
Factors of production is an economic term that describes the inputs that are used in the production of goods or
services in order to make an economic profit. The factors of production include : (i) Land (ii) Labour (iii)
Capital (iv) Entrepreneur.
Whatever is used in producing a commodity is called its inputs. For example, for producing wheat, a farmer
uses inputs like soil, tractor, tools, seeds, manure, water and his own services.
All the inputs are classified into two groups—primary inputs and secondary inputs. Primary inputs render
services only whereas secondary inputs get merged in the commodity for which they are used.
In the above example, soil, tractor, tools and farmer’s services are primary inputs because they render services
only whereas seeds, manure, water and insecticides are secondary inputs because they get merged in the
commodity for which they are used. It is primary inputs which are called factors of production.
Primary inputs are also called factor inputs and secondary inputs are known as non-factor inputs. Alternatively,
production is undertaken with the help of resources which can be categorised into natural resources (land),
human resources (labour and entrepreneur) and manufactured resources (capital).
All factors of production are traditionally classified in the following four groups:
(i) Land
It refers to all natural resources which are free gifts of nature. It includes raw property and anything that comes
from the ground. It can be a non-renewable resource. The income earned by owners of land and other resources
is called rent.
(ii) Labour
Human efforts done mentally or physically with the aim of earning income is known as labour. The reward or
income for labor is wages.
(iii) Capital
All man-made goods which are used for further production of wealth are included in capital. This are the
manufactured aids to production. The income earned by owners of capital goods is called interest.
(iv) Entrepreneur
An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved
in the production. The individual who combines the factors of production in order to produce a good or service.
The income entrepreneurs earn is profits.\
TYPES OF BUSINESS UNITS
Introduction
These are the top five types of business units. The types are: 1. Individual Proprietorship 2. Partnership 3. Joint Stock
Company.
1. Individual /Sole Proprietorship:
Sole or individual proprietorship is the oldest and simplest form of business organisation. In this type of organisation, an
individual is the sole ownership of the business. He supplies land; labour, capital, etc. individually. In case capital is insufficient
it is borrowed on interest. Land may also be taken on rent. A single man performs twin functions of an organizer as well as that
of an entrepreneur.
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, The functions of management, supervision and risk-taking are performed by the individual proprietor. Labour work is also
performed by himself or with the help of his family members. If need arises, paid labour can also be arranged for.
In individual proprietorship, the owner himself is responsible for the profit or loss. It means there is unlimited liability in the
individual proprietorship. Such type of proprietorship is found in the small scale industries or in the case of shopkeepers.
Its Merits:
Individual enterprise or proprietorship has the following advantages:
1. Easy to Start: 2. Independence: 3. Personal Incentive: 4. Easy to Supervise: 5. Quick Decisions: 6. Need of Small Capital:
7. Direct Relations with Customers: 8. Business Secrets: 9. No Danger of Labour Disputes: 10. Easy to Close:
Its Demerits:
Individual proprietorship has the following demerits:
1. Lack of Division of Labour: 2. Difficulty of Large Scale Production: 3. Unlimited Liability: 4. High Cost of Production: 5.
Less Possibility of Use of Machines:6. Difficulty of Credit: 7. Lack of Technical Development:
8. Difficultly to Face Economic Crisis:
2. Partnership:
As a form of business organisation, the partnership has much wider scope as compared to the individual proprietorship. When
two or more than two persons join to start and run a business on the basis of their common and shared responsibility in the
matter of profit or loss, it is called the partnership. In other words, the individual proprietorship is converted into partnership if
one person or more than one person is taken as partners in the business. Partnership generally takes place among those persons
who are either relatives, friends or known to each other. Partnership has the following characteristics which separate it from
other forms of business organisation.
(a) Types of Partnership:
In this type of business organisation, the partners can be of the following types:
(i) Working Partners: The share-holders or partners, who participate in the daily functioning of the business or help other
partners, are called the working partners.
(ii) Sleeping Partner: Sometimes a person invests his capital in the business but he does not participate in the working of
business. He is known as the sleeping partner.
(iii) Partners with Capital: Partners with capital are those who invest capital in business but may or may not participate in it.
(iv) Partners without Capital: Sometimes partners are created in the business due to the particular skill or business ability of
such persons. They do not invest capital. To have benefits from his business ability, the partners with capital make him also a
partner in their business. A partner without capital is also given the prescribed share out of the profits.
(b) Unlimited Liability: Every partner has an unlimited liability. He is responsible for every type of liability apart from his
own share. If a partner is unable to clear his liability, his burden shifts to other partners.
(c) Partnership Deed: Partnership is formed on the basis of a ‘Partnership Deed’ in which an agreement regarding the rights
and duties, salary, share in the capital, etc. of each partner is mentioned.
(d) Limit of Partnership: The government can determine the maximum number of partners in a business in a country. The
number of partners cannot exceed this prescribed limit. For example, the maximum number of partners in a bank is 10 and in
other businesses it is 20 in India.
(e) Non-Transferability of the Shares: Shares cannot be transferred to anybody else. No partner can sell his shares to other
persons. But he can do so, only if other partners agree to this.
Its Merits: 1. Careful Decisions: 2. Division of Work: 3. More Capital: 4. Large Scale Production: 5. Division of Labour: 6. Use
of Machines: 7. Easy Credit: 8. Personal Interest:
Its Demerits:
1. Lack of Mutual Confidence, 2. Personal Disputes: 3. Difficult to Separate: 4. Delay in Decision: 5. Difficult to Close: 6.
Unlimited Liability: 7. Lack of Responsibility: 8. Uncertainty:
3. Joint Stock Company:
Joint Stock Company is one of the most important forms of business organisation of the modern age. There are certain large
scale enterprises which cannot be operated on the basis of the individual proprietorship or partnership.
To start such an enterprise a huge amount of capital is collected by a joint stock company. It is an extended form of the
partnership business. When a number of persons, who are unknown to each other, join together to invest their money in some
common business, it is called the Joint Stock Company.
Formation of Joint Stock Company:
A Joint Stock Company is formed according to the laws of the country. (This form of business organisation came into existence
with the enactment of the Indian Companies Act, 1913, which has been amended from time to time).
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Factors of production is an economic term that describes the inputs that are used in the production of goods or
services in order to make an economic profit. The factors of production include : (i) Land (ii) Labour (iii)
Capital (iv) Entrepreneur.
Whatever is used in producing a commodity is called its inputs. For example, for producing wheat, a farmer
uses inputs like soil, tractor, tools, seeds, manure, water and his own services.
All the inputs are classified into two groups—primary inputs and secondary inputs. Primary inputs render
services only whereas secondary inputs get merged in the commodity for which they are used.
In the above example, soil, tractor, tools and farmer’s services are primary inputs because they render services
only whereas seeds, manure, water and insecticides are secondary inputs because they get merged in the
commodity for which they are used. It is primary inputs which are called factors of production.
Primary inputs are also called factor inputs and secondary inputs are known as non-factor inputs. Alternatively,
production is undertaken with the help of resources which can be categorised into natural resources (land),
human resources (labour and entrepreneur) and manufactured resources (capital).
All factors of production are traditionally classified in the following four groups:
(i) Land
It refers to all natural resources which are free gifts of nature. It includes raw property and anything that comes
from the ground. It can be a non-renewable resource. The income earned by owners of land and other resources
is called rent.
(ii) Labour
Human efforts done mentally or physically with the aim of earning income is known as labour. The reward or
income for labor is wages.
(iii) Capital
All man-made goods which are used for further production of wealth are included in capital. This are the
manufactured aids to production. The income earned by owners of capital goods is called interest.
(iv) Entrepreneur
An entrepreneur is a person who organises the other factors and undertakes the risks and uncertainties involved
in the production. The individual who combines the factors of production in order to produce a good or service.
The income entrepreneurs earn is profits.\
TYPES OF BUSINESS UNITS
Introduction
These are the top five types of business units. The types are: 1. Individual Proprietorship 2. Partnership 3. Joint Stock
Company.
1. Individual /Sole Proprietorship:
Sole or individual proprietorship is the oldest and simplest form of business organisation. In this type of organisation, an
individual is the sole ownership of the business. He supplies land; labour, capital, etc. individually. In case capital is insufficient
it is borrowed on interest. Land may also be taken on rent. A single man performs twin functions of an organizer as well as that
of an entrepreneur.
1
, The functions of management, supervision and risk-taking are performed by the individual proprietor. Labour work is also
performed by himself or with the help of his family members. If need arises, paid labour can also be arranged for.
In individual proprietorship, the owner himself is responsible for the profit or loss. It means there is unlimited liability in the
individual proprietorship. Such type of proprietorship is found in the small scale industries or in the case of shopkeepers.
Its Merits:
Individual enterprise or proprietorship has the following advantages:
1. Easy to Start: 2. Independence: 3. Personal Incentive: 4. Easy to Supervise: 5. Quick Decisions: 6. Need of Small Capital:
7. Direct Relations with Customers: 8. Business Secrets: 9. No Danger of Labour Disputes: 10. Easy to Close:
Its Demerits:
Individual proprietorship has the following demerits:
1. Lack of Division of Labour: 2. Difficulty of Large Scale Production: 3. Unlimited Liability: 4. High Cost of Production: 5.
Less Possibility of Use of Machines:6. Difficulty of Credit: 7. Lack of Technical Development:
8. Difficultly to Face Economic Crisis:
2. Partnership:
As a form of business organisation, the partnership has much wider scope as compared to the individual proprietorship. When
two or more than two persons join to start and run a business on the basis of their common and shared responsibility in the
matter of profit or loss, it is called the partnership. In other words, the individual proprietorship is converted into partnership if
one person or more than one person is taken as partners in the business. Partnership generally takes place among those persons
who are either relatives, friends or known to each other. Partnership has the following characteristics which separate it from
other forms of business organisation.
(a) Types of Partnership:
In this type of business organisation, the partners can be of the following types:
(i) Working Partners: The share-holders or partners, who participate in the daily functioning of the business or help other
partners, are called the working partners.
(ii) Sleeping Partner: Sometimes a person invests his capital in the business but he does not participate in the working of
business. He is known as the sleeping partner.
(iii) Partners with Capital: Partners with capital are those who invest capital in business but may or may not participate in it.
(iv) Partners without Capital: Sometimes partners are created in the business due to the particular skill or business ability of
such persons. They do not invest capital. To have benefits from his business ability, the partners with capital make him also a
partner in their business. A partner without capital is also given the prescribed share out of the profits.
(b) Unlimited Liability: Every partner has an unlimited liability. He is responsible for every type of liability apart from his
own share. If a partner is unable to clear his liability, his burden shifts to other partners.
(c) Partnership Deed: Partnership is formed on the basis of a ‘Partnership Deed’ in which an agreement regarding the rights
and duties, salary, share in the capital, etc. of each partner is mentioned.
(d) Limit of Partnership: The government can determine the maximum number of partners in a business in a country. The
number of partners cannot exceed this prescribed limit. For example, the maximum number of partners in a bank is 10 and in
other businesses it is 20 in India.
(e) Non-Transferability of the Shares: Shares cannot be transferred to anybody else. No partner can sell his shares to other
persons. But he can do so, only if other partners agree to this.
Its Merits: 1. Careful Decisions: 2. Division of Work: 3. More Capital: 4. Large Scale Production: 5. Division of Labour: 6. Use
of Machines: 7. Easy Credit: 8. Personal Interest:
Its Demerits:
1. Lack of Mutual Confidence, 2. Personal Disputes: 3. Difficult to Separate: 4. Delay in Decision: 5. Difficult to Close: 6.
Unlimited Liability: 7. Lack of Responsibility: 8. Uncertainty:
3. Joint Stock Company:
Joint Stock Company is one of the most important forms of business organisation of the modern age. There are certain large
scale enterprises which cannot be operated on the basis of the individual proprietorship or partnership.
To start such an enterprise a huge amount of capital is collected by a joint stock company. It is an extended form of the
partnership business. When a number of persons, who are unknown to each other, join together to invest their money in some
common business, it is called the Joint Stock Company.
Formation of Joint Stock Company:
A Joint Stock Company is formed according to the laws of the country. (This form of business organisation came into existence
with the enactment of the Indian Companies Act, 1913, which has been amended from time to time).
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