Factors of Production & Productive Mechanism

Factors of Production and Productive Mechanism

• Four factors of production include land, labor, capital, and entrepreneurship.
• Production becomes feasible through the combination of these four factors.
• A productive mechanism describes the system facilitating the production of goods and services.
• Factors of production act as "inputs" to generate an "output."
• Production involves creating utilities, which define the want-satisfying attributes of goods.
• Form utility involves changing an item's shape or form to enhance its utility, like making clothes from fabric.
• Place utility increases an item's utility by providing it in a different location, such as transporting sand to a construction site.
• Service utility comes from professionals such as teachers, doctors, and lawyers.
• Time utility ensures goods are available when needed, for example, storing summer clothes for use in the summer.

Primary and Secondary Factors of Production

• Land and labor constitute the primary factors of production.
• Capital and entrepreneurship represent the secondary factors of production.
• Factors are used together in production, with proportions that may vary.
• All factors possess a physical existence and application.

Land as a Factor of Production

• Land encompasses all free gifts of nature available for human use, including sunlight, air, water, and minerals, extending beyond the earth's surface.
• The supply of land remains limited due to its nature as a gift of nature.
• Land offers varied uses, such as building homes, farming, or establishing industries.
• Land is immobile, meaning it cannot be moved.
• Land fertility differs and is subject to the law of diminishing marginal returns.

Law of Diminishing Marginal Returns

• As more variable factors are added, output decreases after a certain point.

Labor as a Factor of Production

• Labor includes both physical and mental exertion used to create goods and services.
• Division of labor entails separating a single process into distinct tasks.
• Division of labor enhances efficiency and lowers production costs.
• It improves worker skills and reduces costs.
• Labor mobility refers to laborers' ability to move.
• Laborers can move easily from one place or occupation to another.

Capital as a Factor of Production

• Capital comprises wealth or resources used for production or starting a business.
• Capital is a man-made means of production, not a free gift of nature.
• Capital includes machinery, equipment, and tools.
• Capital comes from savings, which, when channeled, result in capital formation.
• Capital goods are durable for long-term use.
• Capital is a passive factor needing entrepreneurs for deployment.
• Capital has an elastic supply that can increase or decrease.
• Capital is transferable from one occupation to another, or one place to another.

Capital Formation

• Capital formation is the creation of capital.
• It involves creating savings, mobilizing savings, and investing savings.
• India's rate of capital formation is slow due to low saving ability, lack of desire to save, and limited banking knowledge.

Entrepreneur as a Factor of Production

• Entrepreneurs take risks, combine factors of production, and make decisions.
• Business people are entrepreneurs.
• Entrepreneurs solve problems, make decisions, and possess extensive knowledge.

Demand Defined

• Demand is more than a desire; it requires the ability and willingness to pay, specifying quantity and time.
• Purchasing power affects demand.

Individual Demand vs. Market Demand

• An individual consumer's demand for a good constitutes individual demand.
• Market demand equals the cumulative demand for all goods.

Determinants of Individual Demand

• Demand depends mainly on the price of a good.
• Price and demand are inversely proportional.
• Demand decreases as price increases.
• The law of demand explains this relationship.
• The law of demand states that quantity demanded decreases when price increases, all other things being equal.
• Demand also depends on income; demand increases as income increases.
• Demand depends on the price of related goods, such as substitutes.
• Substitute goods see a demand increase when the price of another good increases, for example, tea and coffee
• Demand for these goods is interrelated.
• Complementary goods function together, such as petrol and cars.
• Demand for cars will fall if petrol prices increase.
• Demand is also determined by tastes; certain goods are consumed regardless of price.

Market Demand

• Market demand represents the cumulative demand from all individuals.
• Demand increases when market income distribution becomes equal.
• Demand grows if poorer people have more money, increasing their demand.
• Demand depends on climatic conditions; colder regions see higher demand for blankets.

Demand Curve

• A demand curve is a table that relates prices for a good to demand.
• It slopes downward from left to right and is rectangular hyperbolic.

Reasons for Downsloping Curve

• The main reason is the law of diminishing marginal utility.
• Diminishing marginal utility is when consuming the same item results in decreasing happiness.
• The substitution effect causes people to switch when prices increase.
• The income effect causes people to buy more when things are cheaper.

Difference/Exception to Law of Demand

• An exception occurs when the law of demand fails.
• In Giffen goods, demand increases even if the price increases.
• This mainly occurs due to the nature of inferior and lower-value goods like Jawar and Bajra.
• The bandwagon effect leads to people buying based on popular trends, even if prices increase.

Change in Demand

• Changes can occur in quantity demanded or demand.
• Change in quantity demanded includes extension and contraction.
• Extension in demand occurs when prices fall.
• Contraction in demand occurs when prices rise.
• A movement happens in the change in quantity demanded.
• A shift happens in the simple change in demand.
• In change in demand, a rise in demand and a fall in demand occurs.
• Prices remain constant when demand increases.
• This change in demand shifts rightwards.
• Shifts in demand also happen when income increases, even with low change in price.

Elasticity in Demand

• Elasticity is the responsiveness of the quantity of goods to various factors.
• These factors include price, income, etc.
• Elasticity can exist in varying degrees.
• These degrees include perfectly elastic demand.

Different Degrees of Elasticity

• Perfectly Elastic Demand
  • Demand changes even if price does not.
• Greater than Unity
  • High change in price greatly affects demand.
• Unity Elastic Demand
  • Changes in price mirror changes in demand.
• Less than Unitary
  • Change in price is greater than the percentage change in demand.
• Perfectly Inelastic
  • Demand remains constant despite price changes.

Measuring Elasticity

• Price is calculated through the formula: percentage change in quantity / percentage change in price.

Market

• A setting where goods are bought and sold.
• It is not necessarily a physical place.

Types of Market: Perfect Competition

• A market with many buyers and many sellers.
• Prices are set by sellers.
• Each product is indistinguishable from another.
• Entry and exit is easy.
• Perfect knowledge exists.

Types of Market: Monopoly

• A market with only one seller.
• The seller may not have a physical location (e.g., government power companies).
• There are no close substitutes, compelling people to buy.
• Barriers to entry exist.

Types of Market: Monopolistic

• A hybrid of monopoly and perfect competition.
• There are many buyers and sellers.
• Products are differentiated through advertising.

Money

• Money is used for payment exchange.
• Resolves issues of the barter system related to the double coincidence of wants.

Narrow Definition

• Total money supplied to the public at a certain time.
• M1 = C + DD + OD, where C is the sum of all currency, DD is demand deposits, and OD is other deposits.
• M2 = M1 + Savings with Post Office
• M3 = M2 + Time Deposit
• M4 = M3 + Savings with Post Office.
• M4 is the most accurate and M1 is the least accurate representation.

Function of money

• Medium of exchange
• Measurement of goods
• Instalment payment
• Transfer value

Banks

• Banks accept deposits and lend money.
• Commercial and joint-stock banks function to both deposit and lend money.
• Banks act as agents, working with others.

Central Bank

• Acts as a banker to banks.
• Central Bank is the apex institute for banks.
• Acts as a lender of last resort.
• Central banks do not work for profit, unlike commercial banks.
• Central banks do not deal with deposits but commercial banks do.
• Central banks advise the government.
• There is only one central bank, versus many commercial banks.

The Role of Money Supply & Interest Rates

• Interest rates increase when the money supply is high.
• Quantitative and qualitative techniques exist to control these rates.

Ways of Monetary Policy Control (Quantitative)

• Bank rate: The interest rate, which decreases money when high, and vice versa.
• CRR (Cash Reserve Ratio): Banks keep a fixed percentage to themselves; a high percentage means less money is circulated.
• Open Market: Buying government bonds increases buying.
• SLR (Statutory Liquid Reserves): The amount that banks save instead of circulate.

Ways of Monetary Policy Control (Qualitative)

• Moral suasion
• Rationing of lending

Public Finance

• Related to government funds, their use, arrangement, and returns.

Tax

• A main part of government revenue.
• It is a compulsory payment to the government.
• Direct taxes include wealth tax and are directly imposed.
• Indirect taxes include goods and service taxes.

Merit and Demerit of Direct Tax

• There is an equitable burden.
• The tax is certain.
• Collection cost is low.
• High elasticity.
• Civic awareness.

Desmerits of Direct Tax

• Non-compliance
• Inconvenience
• Injustice
• Tax evasion
• Disincentive to save and invest

Indirect Tax

• Tax on goods and services.
• It is not direct.

Public Expenses

• Government spending on things like roads and railways.

Public Debt

• Money taken during for projects etc.

Types of inflation

• Sustained increase goods and services

Highlation

Levels of inflation:

• Creeping: 2–3%
• Walking: ~5%
• Running: ~10%
• Hyper: ~200%

Reasons for rising inflation

• Demand pull: money chasing fewer goods
• Cost push: includes labour rise

Con Awareness

• Lack of consumer awareness
• Low weight.

Consumer Rights

Include:

• The right to safety
• The right to choose
• The right to be heard
• The right to seek redressal
• The right to consumer education
• The right to be informed

Consumer Duties

Include:

• Checking quality
• Gaining knowledge of products
• Demanding a memo
• Filing a case when necessary

Act

• Consumer Protection Act, to file a dispute

COPRA

• (Consumer Protection Act) is where consumers go for dispute resolution. There are 3 levels:
• First level: district forum - up to 20 lacks
• Second level: state-level - between 20 lacks and 1 crore
• National level: higher than 1 crore
  • All cases can appeal to the Supreme Court.

RTI

• The Right to Information, where all works can be checked.

Explore the four factors of production: land, labor, capital, and entrepreneurship. Understand how these factors combine to enable production and create utilities. Learn about form, place, service, and time utility in creating goods and services.