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THEORY OF PRODUCTION
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- Lancaster University (LU)
Theory of production explained comprehensively
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Theory of ProductionFACTORS OF PRODUCTION
The sum total of the economic resources which we have in order to provide for our economic wants are
termed as factors of production. Traditionally economists have classified these under four headings. They
are:
i) Labour
ii) Land primary factors
iii) Capital
iv) Enterprise secondary factors
The first two are termed primary factors since they are not the result of the economic process; they are, so to
speak, what we have to start with. The secondary factors, however are a consequences of an economic
system.
i) Land
The term land is used in the widest sense to include all the free gifts of nature; farmlands, minerals
wealth such as coal mines, fishing grounds, forests, rivers and lakes.
In practise it may be very difficult to separate land from other factors of production such as capital but,
theoretically, it has two unique features which distinguish it.
Firstly, it is fixed in supply. As land includes the sea in definition, then we are thus talking about the
whole planet, and it is obvious that we cannot acquire more land in this sense.
Secondly, land has no cost of production. The individual who is trying to rent a piece of land may have
to pay a great deal of money but it never cost society as a whole anything to produce land.
ii) Capital
Capital as a factor of production can be defined either as the stock of wealth existing at any one
time and as such, capital consists of all the real physical assets of society. An alternative
formulation of capital is that it refers to all those goods, which are used in the production of further
wealth.
Capital can be divided into fixed capital, which is such things as building, roads, machinery etc and
working capital or circulating capital which consists of stocks of raw materials and semi-
manufactured goods. The distinction is that fixed capital continues through many rounds of
production while working capital is used up in one round; For example, a classroom would be fixed
capital, while stocks of chalk to be used for writing would be circulating/working capital.
As stated previously, capital is a secondary factor of production, which means that results from the
economics system. Capital has been created by individuals forgoing current consumption, i.e. people
have refrained from consuming all their wealth immediately and have saved resources which can then
be used in the production of further wealth.
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,iii) Labour
Labour is the exercise of human, physical and mental effort directed to the production of
goods and services. Included in this definition is all the labour which people undertake for
reward, either in form of wages and salaries or incomes from self employment. We would
not, therefore include housework or the efforts of do-it-yourself enthusiasts, even though
these may be hard work.
Some aspects of labour
Labour is no doubt the most important of all factor or production, for the efficiency of any production will to
a large extent depend on the efficiency and supply of the labour working in the process. Besides labour is
also the end for which all production is undertaken.
Supply of labour
Supply of labour refers to the number of workers (or, more generally, the number of labour hours)
available to an economy. The supply of labour will be determined by:
I. Population Size
In any given economy, the population size determines the upper limit of labour supply. Clearly there
cannot be more labour than there is population.
II. Age Structure
The population is divided into three age groups. These are:
The young age group usually below the age of 18, which is considered to be the minimum age
of adulthood. People below this age are not in the labour supply, i.e. they are not supposed to be
working or looking for work.
The working age group, usually between 18 and 60, although the upper age limit for this group
varies from country to country. In Kenya for example, for public servants, it is 55 years. It is
the size of this group which determines the labour supply.
The old age group, i.e. above 60 years are not in the labour force.
III. The Working Population
Not everybody in the working age group will be in the labour force. What is called the working
population refers to the people who are in the working group, and are either working or are actively
looking for work, I.e. would take up work if work was offered to them. These are sometimes called
the actively active people. Hence this group excludes the sick, the aged, the disabled and (full time)
housewives, as well as students. These are people who are working and are not willing or are not in a
position to take up work was given to them.
IV. Education System
If the children are kept in school longer, then this will affect the size of the labour force of the country.
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, V. Length of the Working Week
This determines labour supply in terms of Man-hours. Hence the fewer the holidays there are, the
higher will be the labour supply. This does not, however mean that if the number of working hours in
the week are reduced, productivity if there is a high degree of automation.
VI Remuneration
The preceding five factors affect the supply of labour in totality. Remuneration affects the supply of
labour to a particular industry. Thus, an industry which offers higher wages than other industries will
attract labour from those other industries.
VII The Extent to Barriers to Entry into a Particular Occupation
If there are strong barriers to the occupation mobility of labour into a particular occupation, e.g. special
talents required or long periods of training, the supply of labour to that occupation will be limited.
Efficiency of Labour
Efficiency of labour refers to the ability to achieve a greater output in a shorter time without any falling
off in the quality of the work – that is to say, increase productivity per man employed. The efficiency of a
country’s labour force depends on a number of influences.
i. Climate
This can be an important influence on willingness to work, for extremes of temperatures or high, humidity
are not conducive to concentration even on congenial tasks.
ii. Education and training
Education and training produce skills and therefore efficient labour. Education has three aspects: general
education, technical education and training within industry. A high standard of general education is
essential for developing intelligence and providing a foundation upon which more specialized vocational
training can be based. Technical training provided in the universities, colleges and by industry itself.
Training within industry is given by each firm to its employees.
iii. Working Conditions
Research has shown that if working conditions are safe and hygienic, the efficiency of labour will be
higher than if the conditions were unsafe or unhygienic.
iv. Health of the worker
The efficiency of the worker is closely related to his state of health which depends on his being
adequately fed, clothed, and housed.
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