Factors of Production

The Productive Mechanism

The productive mechanism is the mechanism or system which determines the production of various goods and services in an economy. Production is the process of creating various goods and services which are consumed by the people of a country. It is a process in which some materials are transformed from one form to another. Things used in the production process are called inputs or factors of production and the things obtained from the process are called outputs. The production also means the creation of utility.

Factors of production


  • Creation of Utility
  • Creation of Material Goods

Form Utility: Utility is the want-satisfying power of a commodity. It is one way of creating utility by changing the form of a commodity. For example, a carpenter uses wood to make a chair. The wood has utility for a carpenter, but it does not have utility for the final consumer. The consumer wants the chair. Hence, the carpenter creates utility when he makes a chair out of wood.

Place Utility: Utility may also be created by changing the location of a commodity. A commodity in Chennai does not have utility for a consumer in Delhi. This commodity will have utility only when it is transported from Chennai to Delhi. Hence, utility is created by transporting a commodity from one place to another.

Service Utility: Utility may be created by performing services such as services of doctors, teachers, lawyers, and chartered accountants. Hence, these services rendered by individuals should be considered creating utility.

Time Utility: Utility can also be created by storing surplus goods at one particular time period and supplied at another time period when they are scarce. The Food Corporation of India (FCI) creates time utility by creating a buffer stock of food grains in the harvesting season and supplies the same at a reasonable price in the lean season.

Meaning of Factors of Production

Factors that are used to carry out the process of production are called factors of production. In the modern economy, economists classified these factors into two categories. They are land and labor, as capital is created by the application of labor on the land and an entrepreneur is a human resource who performs and controls the business. Therefore, land and labor are the primary factors of production, whereas capital and the entrepreneur are the secondary factors of production.

Factors of Production

  • Land
    • Free gifts of nature
    • Limited in supply Air, Water, Sun etc.
  • Labour
    • Physical and mental effort
    • Receives income and reward.
  • Capital
    • Produced means of production, Machines, equipment etc.
  • Entrepreneur
    • Carries the risk.
    • Business Co-ordinates of activities of all the factors of production.

Characteristics of the factors of production

  • Factors of production are jointly used in the production of a commodity
  • Variable factor proportions
  • Physical existence
  • Use of factor services
  • Demand for a factor of production is derived
  • All factors of production are not equally mobile


The land is defined so as to include not only the surface of the Earth but also all the other gifts of nature.

Characteristics of Land

  • Land is limited in supply: Supply of land is fixed as it is given by nature.
  • Gifts of nature: Land is a gift of nature which does not have any cost of production. Land is readily available for any use. However, other agents of production are available at a cost.
  • Primary factor of production: Land is a basic factor of production because it cannot produce anything by itself.
  • Land has alternative uses: Land can be used for alternative uses such as cultivation, dairy or poultry farming, rearing of livestock, building of houses and playgrounds.
  • Land is immobile: Land cannot move, but labour and capital can move in the process. It is fixed and cannot move from one place to another place.
  • Land varies in fertility: Different types of land have wide range of production capacity. It depends on the chemical composition of the soil, availability of irrigational facilities and other climatic conditions.
  • Law of diminishing marginal returns: Increased use of capital and labour on a particular area of land leads to an increase in the production at a diminishing rate.

Functions of Land

  • Determines agricultural production: The supply of land resources determines the level of agricultural production in an economy. Nearly 43% of the land area of India is plain and suitable for crop cultivation.
  • Industrial development: Land resources of an economy help in the process of industrialization. The mineral resources are used in different industries. For example, different countries in the Middle East are rich in crude oil resources. So, the petroleum industry has expanded in those countries. The supply of different materials for the expansion of the construction industry also depends on the total land area of the country. For example, the supply of bricks and stones.
  • Supply of natural resources: Availability of natural resources is determined by the availability of total land area in a country. It helps in raising the total output of the country.
  • Maintaining proper land–man ratio.
  • Helping the process of industrialization and urbanization: Land resources of a country help the process of industrialization and urbanization in the country because it requires sufficient supply of land areas for smooth progress.

Importance of Land

  • Determines the total production: The national output of a country depends on the availability of land.
  • Determines the agricultural output: The agricultural output of a country is determined by the availability of cultivable land in a country.
  • Determines industrial production: The industrial output of a country also depends on total area of land.
  • Influences economic growth: The economic growth of a country depends on the growth rate of national output or per capita output. However, the growth rate of national output or per capita output depends on the land availability and other related resources. Proper use of these resources can raise the level of national output.
  • Satisfies the basic needs of the people: The basic needs of the people are satisfied directly or indirectly by the supply of land in a country such as food, shelter and clothing.

Productivity of Land

The productivity of land means the capacity of a piece of land to produce a crop. The average productivity of land is the output obtained from the land divided by the area of land, say output per acre or per hectare of land. The marginal productivity of land is the increase in the output obtained from land when the area of the land used increases by one unit, say by one acre.

Determinants of land

  • Natural factors
  • Proper use of land
  • Investment on land
  • Location of land
  • Scientific method of cultivation using improved technology
  • Social conditions


Characteristics of Labour

Supply of Labour

Efficiency of Labour

Mobility of Labour

Division of Labour


Types of Capital

Characteristics of Capital

Capital Formation


Qualities of an Entrepreneur

Role of an Entrepreneur in Economic Development

Related Articles

Methods of Credit Control

Central Banking

Meaning and Functions of Money

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