1

Lecture 8

Law of diminishing marginal return its application to agriculture - Cost

concepts short run & long run cost curves - optimum level of production

PRODUCTION

Production
Production is defined as creation of utility or the creation of want
satisfying goods and services. In the economic sense the products should have
value not only the utility. Hence production should be defined as not creation
of utility but also creation of value (added value). In the production process,
when single input factor is varied the relationship between one input and
output.
Laws of Returns
There are three laws of returns known to the economists, the law of
diminishing, increasing and constant returns. There is said to be increasing,
decreasing or constant returns according to the marginal returns rise, fall or
remain unchanged as the quantity of factor of production is increasing,
decreasing or constant.
The Law of Diminishing Return
The law of diminishing return was first explained by the classical
economists. They held the application of this law only to agriculture. They
held that if we apply in a piece of land, doses of labour and capital
continuously, the additional yield or marginal return tends to decline. We use
the term marginal returns to denote additional return in economics. Since
marginal returns are successively diminishing, we call the law as Law of
Diminishing Marginal Return (LDMR).
Definition
An increase in the capital and labour applied in the cultivation of land
causes in general a less than proportionate increase in the amount of produce
raised unless it happens to coincide with an improvement in the arts of
agriculture Marshall.
Law of increasing costs
The modern economists have explained this LDMR law in terms of cost of
production also. If average cost tends to increase with every increase in the
size of output, the law of diminishing return is said to be operation. Hence this
law is also known as the law of increasing costs.
Causes
The law of increasing costs operates due to the following reasons.
1. The supply of factors of production is not perfectly elastic.
2.

The factors of production are not perfect substitutes for one another.

3. When the size of firms tends to very large certain disadvantages result.
These are called as diseconomies of scale. This results in a rise in average
cost with every increase in the size of output.

Limitations
1. It does not apply in the initial stage of production of commodities.
2. It will not apply if there are changes in the methods of cultivation or
methods of production.
Illustration: Classical Production Function
Total physical Product (TPP) is the amount of physical product which results
from different quantities of one variable input. In our example we represent
this by the symbol Y.
Average Physical Product: (APP) of an input is defined as the ratio of TPP to
the quantity of input used in producing that amount of product. In terms of
symbols we have used APP = Y/X.
Marginal Physical Product: (MPP) is defined as the addition to product
resulting from the addition of one unit of input. As in case with APP the
amount of other inputs used is held constant in computing marginal product. In
terms of symbols the MPP = Y/X. Thus MPP for a unit of input is the
change in product divided by the change in input. Another way to look at
marginal physical product is that it is the rate of change in total product as the
quantity of input increases.
Regions of production curve
On the basis of marginal physical product curve, the area of production
curve can be divided into three regions.
Region I: Area between O (origin) and to the point where MPP and APP
curves intersect each other irrational production region.
Region II: Area of operation between the point of intersection of APP and
MPP curves and the point where MPP curve touches X axis rational
production region - Most profitable region to operate.
Region III: Area of production where MPP is negative and TPP and APP are
decreasing irrational production region.
As the law states at the increasing input use level, the output increases of
increasing rate up to a point (A), afterwards it increases at constant rate (B),
that is the point of inflexion, then it increases at decreasing rate up to the point
C (where TPP is maximum). And finally it decreases at increasing rate (Region
III).

Product

C
E p >1

E p <1

E p <0
TTP

Region
II
Region I
Irrational

Region
III

Point of
inflection

APP
Input
Fig 8.1 Classical Production Function, APP and MPP
Table 8.1 Law of diminishing return
Inputs TPP APP
TVP MVP
MPP
(X)
(Y)
(Y/X) ( Y X) /TR
1
15
15
75
2
38
19
23
190 115
3
66
22
28
330 140
4
96
24
30
480 150

MIC

MR

MPP

MC

30
30
30

5
5
5

1.3
1.07
1.0
0.8
5
0
-5.0
-1.0

5
6
7
8
9

120
126
126
120
90

24
21
18
15
10

24
6
0
-6
-30

600
630
630
600
450

120
30
0
-30
-150

30
30
30
30
30

5
5
5
5
5

10

50

-40

250

-200

30

Rate of increase /
changes in the slope
Stage I
increasing at constant
rate
Stage I increasing at
constant rate
Stage II

Stage III
Increasing at
decreasing rate

0.75
Labour wage X p =Rs 30 per man days; Output price Y p =Rs 5 per kg
TPP: total Physical Product;
APP: Average Physical Product
MPP: Marginal Physical Product
TVP: Total Value Product: TPP x Y p
TR: Total Revenue: TPP x Y p
MVP: Marginal value product : Y x Y p
MIC: Marginal input cost: X x X p
MR: marginal revenue; price of Y
MC: marginal cost: X p /MPP

Table 8.2 CHARACTERISTICS OF TPP, MPP & APP

Curve I Region
II Region
TPP
Increases at increasing rate and Increases at
then increase at decreasing rate decreasing rate
MPP
Increases and then decreases
Decreases and
but > APP
positive but <
APP
APP
Increases but> MPP reaches the Decreases and
maximum when intersects MPP positive but
>MPP
p
E
>1
<1 but positive

III Region
Decreases
Negative

Decreases
remain positive
<0

E p =MPP/APP;or Elasticity of production E p = % change in TPP/ % change in input

Relationship between TPP, MPP and APP

Since both MPP and APP are derived from TPP, they are closely related.
TPP and MPP: As long as MPP increases, TPP increases at increasing rate,
when MPP declines but positive, TPP increases at decreasing rate. When MPP
is 0, TPP reaches its maximum, when MPP is negative TPP decreases.
MPP and APP: The average efficiency of variable input (APP) depends on the
productivity (MPP) of each successive units of the variable input. As long as
the MPP>APP, APP is increasing, when MPP=APP, APP is at its maximum
when MPP is < APP, APP declines.
Rational and Irrational regions of the production function
In the first region, the average productivity of the variable input
increases continuously as more and more input units are added. So when the
average productivity increases it is not rational to limit the input application in
this region. Hence region I is considered as irrational region for decision
making.
In the third region, the total physical product declines because of the
negative marginal productivity of the inputs. It is not rational to add input
units when the TPP decreases, even if the input is free of cost. Application of
input in the third stage results in double loss due to increased input cost and
loss due to reduced value of output.
The second region is the rational region or decision making region.
Information on input and output prices are necessary to decide the optimum
level of input. The particular level of input which maximizes the profit is the
optimum amount of input and the corresponding level of output is the optimum
output.
Technical efficiency and economic efficiency
Technical efficiency is measured by the physical ratio of output to input.
The greater the ratio, the greater the degree of technical efficiency.
Economic efficiency is related to the objective relevant to the economic
unit (Farm). If profit is the main objective then economic efficiency is
achieved when resources are used to give maximum profit.

DECISION RULE FOR PROFIT MAXIMIZATION

Profit is the difference between total value product (TVP) and total
input cost (TIC). TVP is found by multiplying the total output (TPP) by the
price/ unit of the output (P y ), Total input cost (TIC) is worked out by
multiplying the total quantity of inputs (X) by the price / unit of the input (P x ).
Profit = TVP TIC. Profit is maximum when the difference between TVP and
TIC is the greater.
It is always profitable to increase the application of a variable input as
long as the value of the added output (MVP) is greater than value of added
input (MIC). MVP is worked out by multiplying added output by the price of
the output (P y ). MIC is calculated by multiplying the added input unit ( x) by
the price of that input (Px). The rule for profit maximization is that MVP
should be declining.
MVP = Y .Py,
MIC = X .PX
Y .Py = X .Px or Y / X = Px / Py
i.e, MPP of X should be equal to the ratio of the input price (Px) and output
price (Py). To justify the application of an additional unit of input of input the
MPP of that unit of input should be equal to the price ratio Px/Py. For
example, if Px=Rs.10 and Py=Rs.5, then Px/Py = 10/5=2 i.e. the price of X is
two times greater than the price of Y. Therefore, to justify the application of
an additional unit of input, the MPP of that unit of input should at least be 2 so
that the value of that 2 units of output. ie, Rs.10(2x5) will be equal to the price
of the input (Rs.10.).
The optimum level of input use can also be worked by a simple method.
For each level of input use, the total input cost (TIC) and the value of the
corresponding level of output (TVP) have to be worked out and the profit, ie,
the difference between TVP and TIC has to be calculated. The particular level
of input that gives the maximum profit should be selected as the optimum
level.

TECHNOLOGICAL CHANGE AND PRODUCTION

Technological change in production refers to improvement in knowledge
applied to the production process. Certain technologies are yield increasing
while some are factor saving, where as some others are both yield increasing
and factor saving. For example, high yielding varieties of crops respond to
higher doses of fertilizer and give more yield than local varieties ie., the
production function is shifted (Fig.1) upwards. Some technologies save scarce
resources and a given amount of output can be produced with lesser amount
these resources.
For example as compared to ordinary method of irrigation, drip
irrigation saves about 50 per cent of irrigation water without reducing the
yield. Improved methods of application save fertilizers.
COST CONCEPTS
There are seven cost concepts for any possible production function. They are
1. Total cost
2. Total variable cost

3.
4.
5.
6.
7.

Total fixed cost

Marginal cost
Average total cost
Average variable cost
Average fixed cost

Total Cost (TC) : It is the sum of total fixed and total variable cost. The
difference between total revenue and total cost is the profit. TC =TVC + TFC
Total Variable Cost (TVC): This is also known as total out of packet cost. It
represents the sum of total expenditures on variable inputs like seed, fertilizer,
labour, etc. These are short run cost.
Total Fixed Cost (TFC): Fixed costs are to be incurred irrespective of output
levels. It includes the cost incurred on purchase of land, equipment, buildings,
making permanent improvements like digging wells, fencing, etc. TFC are
meaningful only in the long run.
Marginal Cost (MC): It is more important in terms of business decisions. MC
deals only with variable cost. It is cost of producing an additional unit of
output from the given level of input. In any given length of period the farmer
will produce additional output, as long as the additional output is enough to
pay for the additional cost involved. In the long run the additional output must
cover the average variable cost. MC = TC / Q = TVC / Q
Average Total Cost (ATC):
It is obtained by dividing the total cost by the
output. In the long run the price of the produce must cover the ATC. ATC =
TC/Q where Q is total output and TC is total cost.
Average Variable Cost (AVC): It is the total variable cost divided by the
amount of product produced. The price received by the farmer for his produce
must be at least equal to AVC. If the price falls below the AVC, then the farm
will incur loss. AVC = TVC/Q
Average Fixed Cost (AFC): It is nothing but the total fixed cost divided by
output. AFC = TFC/Q
Cost function: It represents the functional relationship between output and
total cost. The cost function can be depicted in three ways. 1. Arithmetic form
(tabular); 2. Geometric form (graph); 3. Algebraic form (equation)
The geometric form of cost function is depicted in Fig. 2. Algebraically,
C = f(Q) where C=total cost, Q=total output

Relationship between production function and total cost function

It shows the relationship between output and input at constant price. The
cost curve is mirror image of production curve.
i.e., Q=f(X) where X is input used.
The total cost curve is similar to total product curve but in the reverse
order. So TP curve and TC curve are inversely related.

Relationship between TC, TFC and TVC

The TC curve is in same shape as TVC curve but it is above the TVC by the
amount of TFC is a horizontal line because fixed cost remain constant
regardless of the level of output at a given time. TVC is related to utilization
on input in a specific production function. Here the entrepreneur has some
control over inputs. TVC must necessarily rise as the input increases, since
larger output requires more variable inputs.
TC

Cost

TVC

TFC

Output

Fig 8.2 Total cost, total average and fixed cost curves

Relationship between different costs

AFC will vary with each level of output. As the output increases the FC per
unit of output decreases. It is called as spreading of fixed cost. AFC always
slopes downwards irrespective of the level of output.
AVC varies with the level of production and its height depends on unit cost of
input. AVC is inversely related to APP. When APP (Average physical
product) is increasing, AVC is decreasing. When APP is maximum AVC is
minimum. AVC measures the efficiency of input. Efficiency is at maximum
when AVC is minimum and vice-versa.
ATC decreases as output increases, attains a minimum and increases thereafter.
The initial decrease in ATC is due to spreading of fixed cost. ATC and
AVC has the same slope. AVC reaches its lowest point earlier than ATC.

Relationship between MC and MP

As the output increases, MC initially falls due to higher efficiency in
use of variable resource and then increases due to lower efficiency of variable
resources. When MP (marginal product) is at its maximum MC is at its
minimum. When MP increases, MC decrease and vice-versa .
Relationship between AC and MC
MC has definite relationship with ATC and AVC. AVC and ATC curves
will slope downwards and keep falling as long as MC curve is below them.
Conversely, AVC and ATC will move up when MC is above them.

MC will interact the AVC and ATC at their lowest point form below.
MC
ATC

Cost

AVC

AFC

Output

Fig 8.3 Average and Marginal Cost Curves

Lecture 9
Mid-Semester

Lecture- 10
Supply-Graphical derivation of supply from cost curve - supply schedule
supply curve Law of supply elasticity of supply

6 SUPPLY
Supply: It is the amount actually offered for sale at a certain price at a given time.
Stock : Stock is the total volume of a commodity which can be brought into the market for
sale at a short notice where as supply is the quantity which is actually brought in to the
market. Stock is potential supply.
Supply schedule: Supply schedule represents the relation between prices and the
quantities that people are willing to produce and sell at a particular point of time.
Supply curve: Supply curve can be drawn from supply schedule. Thus supply
curve is the graphical representation of the supply schedule which represents the amount of
good that would be offered for sale at different prices during a particular period of time.
Table 10.1 Supply schedule of Rice

6.50

Quantity of
Rice Supplied
(Tonnes)
100

7.00

125

7.50

150

8.00

175

8.50

200

9.00

250

Supply Curve
9.5
9
8.5
Price (Rs)

Price of Rice
(Rs/Kg)

8
7.5
7
6.5
6
100

150

200
Quantity (kg)

250

300

The supply schedule for the whole market is called market supply. It is arrived
at by adding the quantities supplied by all the sellers at varying prices.

Law of supply
Other things remaining same higher the prices of a commodity, the larger will be
the quantity supplied and lower the price the smaller will be the quantity supplied. The
quantity offered for sale varies directly with price. In mathematical terms supply is an
increasing function of price.
Characteristics of supply curve:
1. A given point on the supply curve shows the relation between price and quantity.
2. It slopes upward from left to right because as the price rises the quantity supplied
increases

Reserve Price: The price below which the seller will refuse to sell is called reserve price.

Extension of supply: As price increases the quantity supplied increases, Ceteris

paribus. This is extension of supply. As price decreases, the quantity supplied
decreases, Ceteris paribus. This is contraction of supply. Both extension and
contraction of supply takes place in one and the same supply curve.

Price

Increase and decrease in supply

When a change in supply occurs due to changes in any of the factors
other than price the supply curve is shifted upwards or downwards. For (eg.) when the
technology improves, for the same price an increased quantity will be supplied.
This is known as increase in supply. Similarly due to flood, fire, etc., for the
same price the quantity supplied will be less resulting in decrease in supply.
This is illustrated in Figures
S 1 So S 2
Decrease
in Supply
P2
Increase
Extension
Dm
D
in Supply
of Supply
P0
P0
Contraction
P1
of Supply
in Supply
0

Q1Q0Q2
Quantity Supplied
Fig.10.2 Extension and
Contraction of Supply

Q1 Q0 Q2
Quantity Supplied
Fig. 10.3 Increase and
Decrease

Why supply curve slope upwards?

1)

The higher the price the greater is the incentive. So there is more production and more
supply.

2)

At higher prices the returns from employing particular resources are more
when compare to their other returns from the next best alternate production process.

3)

Due to diminishing returns Average cost and Marginal cost of production increases and it
implies that more quantity of commodity would be produced and supplied in the
market only at a higher price so as to cover higher cost of production.

Determinants of Supply
a) The cost of factor of production: When the cost of inputs increase, the cost of
production will raise and the producers may have to fix higher price to over the
increased costs. A fall in input price will reduce the costs and permit supply at
a lower price.
b) State of Technology: Improvement in technology reduces the cost of
production and increases the supply.
c) Factors outside the economic sphere like flood, drought likes natural
calamities will decrease the supply.
d) Taxation and subsidy: Higher taxation will increase the price and as a result
supply will come down. E.g. If additional tax is imposed on television, its
supply will come down. Granting subsidies will increase supply. For instance,
if more subsides are given for bio gas plants, fertilizer etc. more will be their
supplies.
e) Price of the commodity: When the price of one commodity increases, its
supply also increases.
f) Price of related goods: If the market price for soybean increases, all other
conditions remaining the same, then the farmer would allot more land meant
for other crops to soybean, and therefore, the supply of soybean would be
increased.
g) Entry and exit: Entry of more sellers will increase and the exit will decrease
the supply.
Derivation of Supply Curve from Cost Curve
In the short run, the optimum level of production is obtained at the point
where MR = MC and MR = Price of output (P y ) under perfect competition.
Therefore the marginal cost curve indicates the quantities which the firm produces
at all possible prices. Thus the short run marginal cost curve of the firm is the
supply curve of the perfectly competitive firm in the short run.

SMC
SRS
P3

SAC
Price
SAVC

P2
P1
Price
P0
Cost
0
M0 M1 M2 M3

M0

M1 M2 M3

Output
Output
Figure 10.3 Derivation of short run supply curve.
This is illustrated in the Fig 10.3, At the price P3 the quantity produced or supplied will be M3.
Since only at this level the price is equals to Marginal cost. At P2 Price, the quantity produced
or supplied is M2. Normally the producer will not supply if the price is lesser than the
minimum average variable cost because if they supply they will incur loss. i.e. the price
offered is not even sufficient to meet the average variable cost. Therefore the firms short run
supply curve is identical with that portion of the short run marginal cost curve which lies
above the minimum point of the short run average variable cost. The quantity supplied would
be zero at all prices less than the minimum average variable cost.

Application of law of supply in Agriculture

In developed countries (USA, etc.), Improvement in agricultural technology
increases the supply relatively faster than demand while demand for food rises slowly. So
market prices for food stuffs tend to fall. To avoid this Govt. may announce price supports,
curbed imports through tariffs, announcing subsidies, and other crop restriction programmes.
In developing countries, as the demand for most of the agricultural products is inelastic,
variation in production causes a very large change in prices. The unplanned fluctuations in
agricultural output caused by natural factors greatly affect the prices and incomes of the
farmers. When monsoons fail, agricultural production falls down to a good extent. If there is
good monsoon the supply of agricultural market increases. So
1) If supply is expected to decrease due to drought or flood Govt. may store more
food grains as precaution so as to protect the consumer.
2) If farmers fear for over supply Govt. may help farmers by announcing
procurement prices as well as subsidies and conducting buffer stock operations.

Price determination
Comparing the market demand and supply positions at alternative prices, It could be
seen the table that as price falls the quantity demanded rises and whereas quantity
supplied decreases. When the price is Rs.10, demand is only 100kgs whereas the
supply is 1000. Since the supply is more than the demand, the price will decrease

to Rs.9. In that price, demand increased to 300 whereas supply decreased to 800,
still the supply is more than the demand and hence the price falls to 8. Demand
increased to 400. At that price also supply is higher than the demand and hence
price falls to Rs.7.50. At this price both demand and supply are equal. This price
is called equilibrium price . Beyond this price, demand will be more than the
supply. Both Buyers and sellers are satisfied at P*. At equilibrium price, the forces of
demand and supply are balanced and buyers and sellers are satisfied. This is presented in the
following table and figure.
Table 10.2 Market demand and supply schedules for rice
Price
Total demand Kgs/day
Total supply (Kgs/day)
10.00
100
1000
9.00
300
800
8.00
400
600
7.50
500
500
7.00
700
400
6.00
1000
300
5.00
1300
200

Market demand and supply schedules for rice and equilibrium price and quantity
D

P
P
r
i
c

Q e Quantity
Fig 10.4 Market equilibrium
Thus the equilibrium price set at Rs 7.5 per kg and the equilibrium quantity
at 500 kg per day in rice market.

B. ELASTICITY OF SUPPLY
The elasticity of supply measures the degree of responsiveness of quantities
supplied to the changes in the price of a commodity. Elasticity of supply is the
ratio between percentage change in quantity supplied and percentage change in
price.

Es=

Proportionate change in quantity Supplied

;
Peopotionate change in Price

Qs
X 100
Qs
P
Qs
P
Qs
Es=
=
X
=
X
P
Qs
P P
Qs
X 100
P

Suppose the price of a mango rises from Re.1 to Rs.1.50 and as a result, the supply
rises from 10 to 20 mangoes, then the elasticity of supply is estimated as follows:

It could be inferred from the result that there is a two per cent increase in the
quantity of mango supplied, if its price increases by one per cent.
20-10
X 100
100
Es= 10
=
=2
150-100
50
X 100
100

Different Types of Elasticity of Supply

a) Perfectly inelastic supply: Here, price has no influence on quantity supplied.
The supply is fixed at a given level irrespective of changes in the price
Fig.10.5 (a). The value of elasticity of supply is zero.
b) Inelastic: If the elasticity is less than one, the good is said to have an inelastic
supply. That is, supply of the good is relatively less responsive to changes in
price (Fig. 10.5 (b)).
c) Unit Elasticity: A supply elasticity equal to one refers to the situation where
the percentage change in quantity supplied and percentage change in price are
equal (Fig. 10.5 (c)).
d) Elastic: If the elasticity of supply is greater than one, then the good has an
elastic supply. Here the quantity supplied is relatively more responsive to
changes in price. (Fig. 10.5 (d)).
e) Perfectly Elastic: This is also known as infinitely elastic supply, as its value is
infinite ( ). In this situation, any amount of a commodity will be supplied at
the prevailing market price, but nothing will be supplied at a lower price. (Fig.
10.5 (e))

P2
Es = 0

Es < 1

P2
P1

Es = 1

Price

P1

P2
P1

Q 1Quantity Supplied Q 1 Q 2
Q1
Q2
Fig10.5 .(a) Perfectly Inelastic. Fig. 10.5 (b) Inelastic. Fig. 10.5 (c) Unitary
Elastic

Price

Es > 1

Es =

P1

Price

P2
P1

Q1
Q1

Q2

Q2

Quantity Supplied

Fig. 10.5 (d) Elastic

Fig. 10.5 (e)Perfectly Elastic

ii) Determinants of Elasticity of Supply

a) Time: A longer time period allows producers to make adjustment in quantity in
response to price changes. Hence, a longer period gives a higher elasticity.
b) Cost and Feasibility of storage: Goods that are costly to store will have a low
elasticity of supply. Goods that will soon decay will be supplied within a short
period (after the harvest) in the market irrespective of price levels; their
elasticity of supply will be very low.
Wage Rate (Rs)

iii) Exceptional Supply Curve or Backward

Tending Labour Supply Curve: As per the law
of supply, when price increases, the supply also
W0
increases and vice versa. But for certain
commodities as price increases the supply
decreases. For example, after a certain level of
wage rate, the increase in wage rate will not
S
L1 L0
increase labour supply as people prefer leisure
over work and those who are already working at
Supply of Labour
Fig.10.6 Backward Tending lower wage rate may stop going for work. This
is an exception to law of supply (Fig.10.6).
Labour Supply Curve
W1

Questions for Review:

i) Please match column A with column B:
Column A

Column B

1. Price increase

a) Perfectly inelastic supply

1. Change in production techniques

b) Perfectly elastic supply

2. When supply elasticity is zero

c) Exceptional supply curve

3. When supply elasticity is infinite

d) Increase in quantity supplied

5. Labour supply curve

e) Shift in supply

Answer the following:

1. Explain the law of supply with an example and state the factors determining
supply.
2. Define elasticity of supply? Explain the different kinds of elasticity of supply
with diagrams. What are the determinants of elasticity of supply?
3. What is elasticity? Why supply may not be equal to production? Write about
the practical uses of elasticity of supply? Explain how the equilibrium price
and quantity are determined?

Lecture -11
Theory of firm factors of production land & characteristics; Labour quantity
and quality of labour- - division of labour efficiency of labour - Malthusian
theory.

FACTERS OF PRODUCTIOAN

Production is the process by which a set of inputs are transformed into output. Thus
production means transforming inputs into an output.
The inputs and outputs are both tangible and intangible in nature. So production may
be defined as creation of utility or creation of want satisfying goods and services.
In the theory of production, it is assumed that the entrepreneur aims at
maximizing his profits. A profit-maximizing entrepreneur will seek to minimize
his cost for producing a given output, or to put it in another way; he will maximize
his output for a given level of outlay (input).
In economic sense producing a thing which has utility but not value is not called
production. So production should be defined as not creation of utility but creation (or addition)
of value.
Utilities are created in three forms. They are
1. Form utility.

2. Place utility and

3. Time utility.

A good may be physically changed (form utility) or being transported to place of use
(place utility) or being kept in store till it is required (time utility).

Input: An input is a commodity that goes into or used in the process of production.
Fixed Input: A fixed Input is one where quantity can not be readily changed during the
production process.
Variable Input: A variable input is one where quantity can be changed during production.
Out put: It is the result of production and so it may be any commodity which the firm
produces or processes for sale.
Short run: Short run refers to a period of time in a production process in which the supply of
certain inputs are fixed and other remaining inputs can be varied.
Long run: This refers to a period of time in a production process in which all the inputs are
variable. Nothing is fixed but a change in technology is not allowed.
Very long run: This refers to a period of time in a production process in which both inputs and
technology can be changed.
Production function: This describes the mathematical and technological relationship
between input and output.
Factors of Production:
Productive resources / Inputs which are required to produce a given product are called as
factors of production. They may be of raw materials / services or of capital or of
entrepreneurs. Fraser defines factors of production as a group or class of original
production resources.

Characteristics of factors of production

There are some important characteristics of the factors which have
economic significance. They play an important role in productions. Some
economic production laws are developed based on the characteristics of factors of
production, i.e. law of diminishing return/ variable proportion, returns to scale /
law of substitution.
Characteristics of factors Substitutability
i. Substitutability ii. Complementarity iii. Specificity and iv. Versatility.
i) Substitutability
A factor can be a substitute for another factor in the production process
without affecting the output i.e. Machine can replace human labour in harvesting
of paddy. Machine can replace bullock pairs and human labour in land preparation.
ii) Complementarity
The factors are said to be complementary if increase in use of one factor
leads to increase in use of another factor. Machine needs human labour for
operating the machine. Here machine and labour are complementary factors.
Human labour and capital have both supplementary and complementary
character.
iii) Specificity
A factor is said to be specific when it is used for only one purpose. E.g.
spare parts of a particular machine.
iv) Versatility
A factor is said to be versatile when it can be put to every and any use.
A factor of production say capital is substitute for another factor say labour when some
units of capital can replace some units of labour in the process of production without adversely
affecting the output.
Classification of factors
They are traditionally classified as land, labour, capital and organisation (enterprise)

A. LAND
The term Land has been given a special meaning in Economics. It does not mean soil
as in the ordinary speech, but it is used in a much wider sense. According to Marshall, land
means the materials and forces which are given by the nature freely for mans aid in land and
water, in air and light and heat. Land stands for all natural resources which yield an income or
which have exchange value. It represents those natural resources which are useful and scarce,
actually or potentially.

Peculiarities of land
1. Land is natures gift to man.
2. Land is fixed in quantity, it is said that land has no supply price. So from the
stand point of whole economy the supply of land is perfectly inelastic. But the supply of land
for a particular use or industry is elastic.
3. Land is permanent. There are inherent properties of the land which Ricardo called
original and indestructible.

4. Land lacks mobility in geographical sense.

5. Land provides infinite variation of degrees of fertility and situations so that no two pieces of
land are exactly alike. This peculiarity explains the concept of margin of cultivation.
6. Land has both renewable and non renewable resources.
These are a few peculiarities of land and they have a bearing on economic rent.

B. LABOUR
In Marshalls words: Any exertion of mind or body undergone partly or wholly with a view to
some good other than the pleasure directly derived from the work is called labour.
Thus any work whether manual or mental which is undertaken for monitory condition
alone and not for the sake of pleasure or love is called labour.

Peculiarities of Labour
1)

Labour is inseparable from the labourer itself.

2)

Labour has to sell his labour in person.

3)

Labour cannot be stored.

4)

Labour has a very weak bargaining power.

5)

Labour supply cannot be increased / decreased quickly and so rapid

adjustment of supply of labour to demand for it is not possible.

6)

Labour is not only means of production but also an end of production.

Efficiency of labour
The amount of labour available in a country depends on two factors.
1. Quantity of labour and
2. Quality of labour.
Qualitative aspect of labour is the study of efficiency of labour. Efficiency means the
ability to do work so that the productivity is increased with minimum cost. The efficiency of
labour is a great national asset.
The following are some of the main factors which affect efficiency of labour.

1. Racial qualities: Efficiency of labour depends on heredity and the racial stock
to which he belongs. The fat Punjabi is a hard worker than a Bengali.
2. Natural and climatic factors: A cool breezing climate is more conducive to
work than the tropical climate. Hence an European labourer is more efficient
than a labourer in Asia.
3. Education: It stimulates and strengthens the right type of instincts and built up
character. A technically trained man is naturally more efficient.
4. Personal qualities: If a worker has a strong physique, mentally alert and
intelligent, his efficiency will be greater. Resourcefulness and initiative also
increases efficiency.

5. Organisation and equipment: Labour efficiency also depends on how labour is

organised and what quality of machinery is placed at his disposal. First rate
work cannot be expected from a third rate entrepreneur using second rate
equipment.
6. Environments: If the surroundings are depressing, labour efficiency is bound to
be low. On the other hand, cheerful and bright environments are conducive to
better work.
7. Working hours: The workers must have sufficient intervals for relaxation, long
working hours without suitable rest or recreation will reduce the efficiency of
labour.
8. Fair and prompt payment: A well paid worker is generally contended and puts
his heart into the job. He must also be paid promptly.
9. Labour organisation: An organised effort is more effective. If labourers are
properly organised both inside and outside the place of work in the form of
strong trade union, their efficiency will undoubtedly go up.
10. Social and political factors: Social security scheme guaranteeing freedom
from want, fear and government attitude towards labour will go a long way in
improving labour efficiency.
Division of labour
Division of labour is an important characteristic of modern production. When making of
an article is split up into several processes and each process is entrusted to a separate set of
workers, it is known as division of labour. It is simply a form of specialization of labour. The
division of labour is associated with efficiency of labour.
There are three types of division of labour. They are;

1. Simple division of labour: (or) Functional division of labour: This means

division of society into major occupations eg. Carpenters, Weavers etc.
2. Complex division of labour: The work is split up into different processes and each process
is carried out by a separate group of people. This is the division of labour proper. Eg.
Manufacture of pins, making of bread.
3. Territorial division of labour: This form of division of labour refers to certain localities or
cities or towns specializing in the production of some commodity. Eg. Lock making in
Dindigul, match factories in Sivakasi.
Advantages of division of labour
1. Increase in productivity : Adam Smith describes pin making as divided into 18
distinct operations. With the 18 division of operations in a pin industry, 10 men
can produce 48,000 pins a day. In the absence of division labour and machinery
one man could not produce even 20 pins a day.
2. Increase in dexterity and skill : Practice makes a man perfect. After
repetitive performance of the same task, a worker becomes an expert.
3. Induces inventions : When a man is doing the same work again and again, new
ideas often occur which will enable the worker to invent something by which
the work can be done easily and speedily.

4. Saving time : By division of labour, a worker has to do one process or one part
of a work. Less time is needed to learn a specialised trade than learning the
whole trade.
5. Saving in tools and implements : One set of tools can serve many workers at
the same time, because a worker specialised in one job does not need all the
tools.
6. Diversity of employment : The number and variety of jobs considerably
increased when division of labour is introduced.
7. Large scale production : Division of labour involves production on a. Goods
are also produced at cheaper rates.
8. Right man in the right place : Under the division of labour, workers are
distributed among various jobs that each large scale. Production improves not
only in quantity but also in quality worker is put in the right place.
Disadvantages of division of labour
1. Monotonous : A worker has to do the same job again and again. The work
becomes monotonous and tedious. The worker losses interest in the work.
2. Loss of skill : The worker knows only one part or process in making a machine
and he does not know to make the whole machine.
3. Risk of unemployment : Knowing only a part of the job the worker is in danger
of becoming unemployed. If he happens to lose the job, he may not be able to
get similar job elsewhere.
4 . Evils of factory life : Division of labour facilitate employment of women and
children. The influx of women into factory disrupts the family life.

5. Industry is dehumanized : In division of labour no worker is producing a

complete thing. Every bodys business is nobodys business. If there is any
defect in the goods nobody will take the responsibility. Thus human interest is
lost.
6. Retards human development : The worker has to repeat the same movement. It
narrows his outlook. It has got a very stunning effect on his growth.

7. Dependence on a single industry : Territorial division of labour makes a place

too much dependent on one particular industry, and narrows the field of
employment.
There are chances of man becoming slave of machine.

c) Mobility of Labour
Since the labour has to be delivered by labourer himself, he has to move from
one place to another in order to get employment. There are different kinds of
mobility of labour.

i) Geographical mobility: It is the movement of labourer from one place to

another. This is also called migration. If labourers move out of the country
(India), it is called emigration. If they enter in to the country (India), it is
called immigration.

ii) Vertical mobility: This implies a change in occupation from a lower to a

higher order. (E.g.) An Assistant Professor is promoted as Associate Professor.
iii) Horizontal mobility: This means mobility from one occupation to another
without any change in the occupational status. (E.g.) A stenographer shifting
from one department/firm to another without any promotion or change in
his/her occupational status.
2. Quantitative aspect of labour
Supply of labour depends on population of the country. The following theories try to
explain the increase in population and also indicate the right level of population.

Malthusian theory on the basis of food supply Optimum theory on the basis of per capita
output. 1. Biological theory. 2. Demographic transition theory.
Malthusian theory of population
Thomas Robert Malthus presented his theory in his famous work entitled
An essay on the principle of population (1798).
Salient features
1. Food is necessary to the life of man and so it exercises a strong check on
population i.e. population is necessarily limited by the means of subsistence
(food)
2. Human population increases faster than food production. Population increases
in geometric progression Viz. 1, 2, 4, 8, 16, 32 etc. In short population get
doubled in every 25 years. Food production increases in arithmetic progression
viz. 1, 2, 3, 4, 5, 6 etc, i.e. there will be a constant addition to food supply.
3. Population always increases when the means of subsistence increases unless
prevented by some powerful and obvious checks.
4. There are two types of checks which can keep population on a level with the
means of subsistence. They are the preventive and positive checks.

Preventive checks: They exercise their influence on the growth of population by

bringing down the birth rate and are applied by man himself. They are celibacy,
late marriage, moral restraint and self control in married life.
Positive checks: If people fail to adopt any preventive checks then nature will
apply certain checks to arrest the growth rate of population by increasing the death
rate. They are wars, famines, vices, epidemics and misery.
This positive checks are more painful than preventive checks.

Criticism
1. The mathematical formula is unrealistic and incorrect since it was not so in any
country so far.
2. The theory neglects standard of living. As standard of living increases people
automatically begin to marry late and reproduction is controlled.
3. Malthus ignored the influence of scientific inventions and discoveries and so
the increase in the productivity of land is ignored.
4. Malthus compared population with food production alone and not with total
production of a country.

5. Increase of population is not always harmful for a nation.

6. National calamities may occur both in over populated and under populated
countries.
7. Does not applied to well developed countries.

Applicability to India
Malthusian theory is fully applicable to India, if we consider the following
features that are prevailing in India.
1. Population growth rate is faster than food grains production rate.
2. Both birth rate and death rate are more.
3. Average expectation of life is still low.
4. Standard of living is lower than western countries.
5. Impact of preventive checks is lesser than positive checks.
6. In rural areas traditional method of cultivation alone is adopted.
7. Majority of population (67%) is supported by agriculture.
ii) Optimum Theory of Population
The optimum theory attempts to define what would economically be the ideal size of
population for a particular country. According to the optimum theory, there is a particular size
of population, which along with the existing natural resources and a given state of technology
yields the highest income per capita in a country.

a) Under population: If population of a country is below the optimum size, the

country is said to be under-populated. In under populated country, the natural
and capital resources are not fully exploited (utilized).
b) Over population: If the population is in excess of optimum size, the country is
said to be over populated. Following are some of the problems to be faced by
over-populated country.
1) Average productivity will decrease.
2) Per capita income will be very low.
3) Standard of living will fall.
If the quantity of labour is small relative to the natural resources, then even the
actually available resources remain under-utilized. If the population increases and
more labourers become available to be combined with the given stock of the
natural resources and capital equipments, out put per capita or per capita income
will rise. As population continues to increase, a point will finally be reached when
capital and natural resources are fully utilized and, therefore, output per capita is
the highest. The level of population at which per capita output (income) is the
maximum is called the optimum population. If population still goes on increasing,
that is, crosses the optimum point, out put per capita will start declining. The
country would then become over-populated.

Output Per capita

Optimum
Population

M
Size of Population
Fig.11.1 Optimum
Population

Output Per capita

P
P

M MM
Size of Population
Fig.11.2 Shifts in Optimum
Population

In the figure 11.1, at OM level of

population, the output per capita (MP) is
the highest. If the population increases
beyond OM, output per capita falls.
Therefore,
OM
is
the
optimum
population. If the population of the
country is less than OM, it will be
under-populated and if the population is
more than OM, it will be a case of over
population. The per capita output curve
may change (MP and M P) as a
result of
an increase in resources or
progress in technology and their effects
on optimum population are shown in the
figure 11.2. That is, the size of optimum
population also increases. Dalton has
given a formula with which we can
judge the extent to which the actual
population of a country deviates from
the optimum population. The extent of
deviation is called mal-adjustment.

The formula is
M = A-O / O. Where M is maladjustment, A is actual population
and O is optimum population. If M is negative, the country is under-populated. If
M is zero, the country has optimum population and if M is positive, the country is
over populated. For instance, if the actual population is 80 crores and the optimum
population is 40 crores, then M=80-40 / 40 =1. This indicates that the country is
over populated.

c) Criticism on Optimum Theory of Population

1) It is almost impossible to determine the optimum size of population, as it is
very difficult to estimate the level of capital stock available in a country.
2) As the natural and capital resources continuously change, the size of optimum
population is also subject to change.

d) Malthusian Theory and Optimum Theory of Population

1) Malthus focused his attention on food production, whereas the optimum theory
takes into consideration of economic development in all its aspects.
2) Malthus seemed to be thinking of maximum number for a country, which, if
exceeded, would bring misery. According to the optimum theory, there is no
rigidly fixed maximum population.
3) According to Malthus, famine, war and disease were the indicators of over
population. But the declining trend of per capita output would indicate the over
population as per the optimum theory.

Questions for Review

Fill up the blanks
1. According to Malthus, the food production increases in ------- ratio and
population increases in -------- ratio.
2. Land is a natures free gift, while capital is -----------.
3. Labour has a weak bargaining power, as it is highly ------------.
4. Labour has relatively lesser mobility than ---------------.
5. Late marriage is an example of -------------- check.
6. Tamil Nadu State Transport Corporation is a --------------.
7. The control of population due to famine is a -------------- check.
III Answer the following
1. What are the factors of production? Define them.
2. What are the characteristics of land?
3. Explain division of labour- its merits and demerits.
4. What are the characteristics of labour?
5. What are the factors that influence the quality of labour?
6. Describe mobility of labour.
7. Describe the Malthusian theory on population
8. Explain the Optimum theory on population
9. Explain the impact of technological progress on the size of optimum
population.
10. Explain the criticism on population theories.

Lecture 12
Capital - characteristics - capital formation; Organization of business firms
types and characteristics - Concept of shares &debenture.

CAPITAL
Meaning and definition: Capital is not a original factor like land. It is man-made.
That is, it is the result of human efforts, Man constructs capital equipments to help
him in the production of other goods and services. Hence Bohm Bawerk defines
capital as produced means of further production . Thus the term capital is
used to describe all those instruments of production which are deliberately made
by man to be used to carry on production in the future. Capital is therefore unique
among factors of production in that man exercises complete control over its
creation. (Stonier and Hague).
Capital and Income: Capital is a stock of fund existing at a given moment, as
opposed to income which is a flow over time i.e., so much per week or per year.
Capital and Money: Capital is not same as money, Money is the means to buy
real goods and services. It can be used to buy consumer goods as well as capital
goods. Money used to buy consumer goods (rice) is not definitely capital. Money
used to buy capital goods (tractor) is capital.
Capital and wealth: Capital has to be distinguished from wealth. Wealth includes
both consumption goods and capital goods. Hence all capital is wealth but all
wealth is not capital.
Capital goods and consumption goods: Capital goods differ fundamentally from
consumption goods. Capital goods are used for the production of other goods and
they cannot directly satisfy human wants. Eg. Tractor, but consumption goods
directly satisfy human wants and they cannot be used for the production of other
goods. Eg. Rice.
Land and Capital: Land is not regarded as capital because
1. Land is a free gift of nature but capital is man-made or it is a produced agent
of production.
2. Capital is perishable, where as land is in-destructive and permanent.
3. Capital is mobile but land has no mobility.
4. The amount of capital can be increased but the quantity of land is fixed and
limited.
Income from capital is uniform where as rent for land varies.
Types of Capital
a. Fixed capital and working capital
Fixed capital: These are durable-use producers goods which are used again and
again till they wear out. Eg. Machineries, tools. Tractors, etc. Here fixed refers to
time and not to place.
Working capital: These are single use producers goods like raw materials. They
are used up in a single act of production. Moreover, money spent on them is fully
recovered when goods made them are sold in market. Consists of raw materials for
factories, fertilizers, etc., which directly assist in the production of goods.

b) Sunk capital and floating capital: Sunk capital is meant only for a specific
purpose, (E.g.) cane crusher, paddy thrasher etc. They cannot be used for any
other purpose. Floating capital can be employed for any use, (E.g.) money.
c ) Social capital and private capital: Private capital is owned by individuals and
the income or benefit derived from these assets are available only to the
individuals who own them (E.g.) tractors, private factories etc. Social capital is
owned by the society as a whole and the benefits derived from these assets are
shared among the members of the society, E.g. bridge, dam, government owned
factories, etc.
All the above comes under the concept of physical capital. The other aspect is
human capital.

Human capital : It refers to the stock of people equipped with education, skills,
health etc.
Characteristics of capital
1. It is man-made and its supply is therefore, within the control of man.
2. It involves the element of time as it renders its services over a period of time
therefore payment to capital is calculated in terms of so much of per cent per
annum.
3. Production of wealth with the aid of capital has been called the round about
process of production.
4. Capital is productive: Labour can produce more with the aid of capital that can
without it. Since capital is productive, there is demand for capital.
5. Capital is prospective: People look forward for getting an income by
accumulating capital. This characteristic of capital explains the supply side of
capital.
6. Supply of capital is elastic. It can be produced in large quantity when its
requirement increases.
7. Capital is perishable as it can be destroyed.
8 Capital is highly mobile.
Functions of capital
1. It increases productivity.
2. It provides subsistence.
3. It provides appliances or auxiliaries of production.
4. It provides materials.
Capital formation or accumulation
It means increase in the stock of real capital in a country. Capital plays a vital
role in productive activity and capital accumulation is basic condition of economic
development. Capital formation depends on savings. The factors which favour
savings or capital formation in a society are;
a) Propensity to save.
b) Power to save and
c) Will to save.
Capital formation consists of the following three stages.

1. Creation of savings: In order to accumulate capital goods some current

consumption has to be sacrificed. If people are willing to reduce their present
consumption, they can devote more resources to build up capital goods for the use
in future. The level of savings in a country depends upon the power to save and
the will to save. The power to save depends upon the level of income of people.
The higher the level of income, the greater will be the amount of saving. Apart
from the power to save, the total amount of savings also depends upon the will to
save. People save in order to provide financial security against their old age and
unforeseen emergencies.
People also save to start business or make provision for their childrens
education, marriage, etc. Savings may be either voluntary or forced. Voluntary
savings are those, which people do of their own free will. Voluntary savings
depend upon the interest rate, power to save and will to save. On the other hand,
taxes by the Government represent forced savings. Savings may be done not only
by households but also by business enterprises and government. Government
savings constitute the money collected as taxes and the profits of public
undertakings. Foreign capital also forms another source of investment. Foreign
capital can be of 1) direct private investment by foreigners, 2) loans or grants by
foreign governments and 3) loans by international agencies like the World Bank,
International Monetary Fund (IMF), etc.

2. Mobilisation of savings: The savings must be mobilized and transferred to

businessmen or entrepreneurs who require them for making investment. In the
capital market, funds are supplied by the individual investors (share holders),
banks, investment trusts, insurance companies, government, etc.
3. Investment of savings: Investment is done by entrepreneurs. The level of
investment or capital accumulation is determined by the cost or supply price of
capital (interest and other cost of acquiring capital), the expectations of profits
and the size of market for goods to be produced.
Foreign capital
Capital formation can also take place with the help of foreign capital. Foreign
capital may come to a country through
1. Direct private investment by foreigners.
2. Loans / grants by foreign Governments.
3. Loans by international agencies like world bank.
Deficit financing
Deficit financing i.e. newly created money, is an another source of capital
formation in a developing economy.
ORGANISATION OR ENTERPRISE
Captain of Industry: In any kind of activity there must be someone at the top to
regulate and coordinate the work of others. Thus, in productive activity also there
must be some one at the top to regulate and coordinate the work of the other
factors of production. We call that person as an entrepreneur (organiser) and the
work he is doing as an enterprise (organisation). Marshall calls the entrepreneur
by the name of Captain of Industry.

Entrepreneurial functions
1. Function of initiation: The entrepreneur takes the initiative in getting business
concern started.
2. Function of choice of location: The entrepreneur has to decide upon the place
where he proposes to set up the business concern.
3. Function of coordination: The entrepreneur has to hire the services of the
other factors of production, namely land, labour and capital. He has to combine
them in the right proportion. Again, he has to coordinate, direct and supervise
the work of these factors.
4. Function of innovation: The entrepreneur introduces the product's scientific
inventions in his business concern now and then.
5. Function of bearing risks and uncertainties: In any business there are risks
and uncertainties. It is the function of entrepreneur to anticipate such
happenings and to overcome them.
Enterprise as a factor different from others
1. The other factors, namely land, labour and capital are hireable, but the
enterprise is not hireable, like great men, entrepreneurs are born and not made.
2. The income earned by land, labour and capital in the form of rent, wages and
interest are contractual income. Whereas, the income earned by entrepreneur in
the form of profit is residual income.

Types of business firms or enterprise of organisation

Organisation of business in modern times is not so simple as it used to be in
the past. It now assumes several forms eg. a) individual entrepreneur b)
partnership c) joint stock company d) co-operative firm e) state enterprise.
a) Individual entrepreneur: This is the earliest and the commonest form of
business organisation. The business is owned and managed by a single man. He
initiates, organise, directs the work and takes the entire risk upon himself. This is
conducted on a small scale.
Advantages: This form of business organisation offers several advantages.
1. The combination of financial interest and the sole responsibility for running the
business is conducive to efficiency. The individual entrepreneur works hard,
long and late. The economy of masters eye prevents wastage and secures
better working.
2. Since all transactions and operations are done by one man no elaborate account
keeping is necessary.
3. It is possible to pay personal attention to all customers and give them entire
satisfaction. Every change in taste and fashion is noted and suitably adjusted.
4. Quick decisions can be taken to meet rapid changes in business conditions.
5. This form of business is the easiest to start and the easiest to close down.
6. Since the organiser is in direct touch with his employees he can maintain more
cordial relations with labourers.
Limitations: There are also limitations from which the individual entrepreneur
suffers.

1. Production and business in modern times requires huge capital. The capital at
the command of the individual organiser is generally meagre. This will limit
the expansion of the business even if it is profitable.
2. Even if one person can provide the capital it would be too risky for him to do so
because failure would involve personal insolvency.
3. It cannot enjoy the advantages of large scale production i.e. economies of scale.
4. One man cannot look after the many sides of business. No country can advance
industrially when her business is organised as individual enterprises.

b) Partnership
Limitations of the one-man business led to another form of business
organisation, viz., partnership. Two, three or more people combine, contribute
capital and agree to share profits and bear losses in agreed proportions. There is
joint management and unlimited liability.
Advantages of partnership
1. It can raise more capital than the individual proprietary concerns.
2. The management is usually efficient because there can be specialisation and
division of functions among the partners.
3. A partnership can grow in size and efficiency by taking new partners.
4. The unlimited liability curbed the speculative tendencies of the partners and
prevents launching of rash and risky enterprises.

Disadvantages
1. The efficiency suffers when partners disagree.
2. It is short lived. According to law, partnership must be dissolved in the event of
a partners retirement, death, bankruptcy or lunacy. In a partnership at will,
any partner can withdraw at any time.
3. Because of unlimited there is great risk. Since every partner can bind the other
partner, one bad partner can ruin all. Every partner is liable to an unlimited
extent, for all the debts of the firm.

C. Joint stock company

The joint stock company is a body corporate with a common seal, owned by
a large number of share holders and managed by Board of Directors elected by the
share holders. The mode of organisation of company and the rights and duties of
the different parties in it are regulated by statutes known as company act. This
type of company was developed after the recognition of the principle of limited
liability, which incorporated in the Indian Company Law in 1857. The principle of
limited liability is that if the company runs into loss, the share holder is
individually responsible only to the extent of his share in the company. It
overcomes most of the shortcomings of individual enterprise and partnership.
There are two main types of joint stock companies. They are private limited and
public limited companies.
1. Joint stock private limited company
The minimum number of members in a private limited company is two and
the maximum 50. The liability of the members is limited. There is no limit for

minimum subscription and private limited company need not submit its annual
balance sheet to the Registrar of joint stock companies. It cannot invite the public
to subscribe to its share capital through public advertisement. The share of the
private limited company are not transferable. Most of the middle sized industries
are run in this manner.

2. Joint stock public limited company

A public limited company can be started by a minimum of seven persons
and there is no maximum. The pioneers or promoters must make an application to
the Registrar of joint stock companies along with the necessary documents.
If the Registrar is satisfied that all legal requirements have been fulfilled,
he will grant the certificate of incorporation. But the company cannot start
business unless a certain minimum percentage of the issued capital has been
subscribed. Chief sources of finance for the company are by selling shares and
borrowing.

a) Shares: Shares are transferable from one person to another. The following are
the common kinds of shares prevalent in a company.
1. The usual kinds of shares to which no special privilege attached are called
ordinary shares . The ordinary share holder gets a dividend out of the net
profit of the company if declared.
2. Another kind of shares is called preference share . These shares are guaranteed
a certain fixed dividend which is paid out of the net profit before dividends are
paid on any other kind of shares. In order to safeguard further the interest of
the preference share holders cumulative preference share are provided on
which dividend at specified rates accumulates whether the company makes
profit or not in a year. There are also participation preference shares which
in addition to obtaining a certain fixed rate of dividend, get a further share in
profits if they exceeds a specified limit.
3. There are deferred or founder shares also, the denomination of founders share
is usually kept low. These shares obtain dividend after it has been paid on the
ordinary and preference shares. The owners of the deferred shares, obtain the
greatest voting power and the largest share in the companys profit.

b) Borrowings
Besides shares, the company usually raise funds by floating debentures
Debentures or security bonds are not shares of the company but they are
promissory notes on the basis of which the company raises additional funds in the
shape of loans. The debenture holders are the companys creditors and they must
be paid the agreed rate of interest whether the company makes profit or not.
Merits of joint stock company
1. It facilitates large scale production. Large sum of capital can be raised and risky
enterprise can be undertaken. The unlimited number and transferability of the
shares enable a joint stock company to raise large funds.
2. It brings together capital and ability. There are many men with money but
without ability and many able men without money. In a joint stock company the

share holders supply the capital, the directors and managers supply business
ability.
3. The share holders risk is reduced. Because of limited liability the share holder
is to pay only the face value of the share if anything goes wrong to the
company. The limitation of possible loss enables risky enterprises to secure
capital.
4. Joint stock company can spend a large amount of money on research and
scientific experiments, thereby improving the quality of goods and reducing
their costs.
5. There is continuity of the company. Because the shares are transferable, a share
holder can withdraw whenever he likes without disturbing the company. There
are organised markets where shares can be sold and purchased viz. stock
exchange.
6. It encourages the process of capital formation. It enables people to invest their
savings in large scale joint stock Company, thereby encouraging them to save
and thus build up the economic strength of the nation.
7. The management is democratic, efficient and economical. Directors are elected
by the share holders and they may not be re-elected if found undesirable.

Evils of the joint stock system

1. Concentration of control : The management is democratic only in name. It is a
democratic capitalists entrusting their surplus fund to a cabinet of their
choice and retaining an active interest in the use to which their capital is put.
The share holders are either powerless or indifferent to influence them.
2. Exploitation by the controlling interest : The persons controlling a company
can so direct policies so as to make profits for themselves. For example, by
distributing contracts to other companies in which they are interested.
3. Possible laxity in management : The executives of a company are more
interested in their own gain than in the share holders profit. Company
management is very often wasteful and extravagant.
4. There is no direct contact between the producer and the consumer on the one
hand between organiser and labourers on the other. The neglect of human
element will lead to loss of economic welfare .
5. The organisation is too ponderous and unwieldy.

D.

Co-operative enterprise
Co-operation is a form of economic organisation where people work
together for a business purpose on the basis of mutual benefit. A cooperative
society is an association of economically weak persons who voluntarily associate
on the basis of equal rights and equal responsibility, transfer to an undertaking one
or several of their economic functions, corresponding to one or several of their
economic needs, which are common to them all, but which each of them is unable
fully to satisfy by his own individual efforts. The cooperation was hailed as a
panacea for all economic ills of a society.
The basic principles of a co-operative organisations are as follows:

1. Eliminations of capitalist proprietor The members of organisation own it,

work and share the profit.
2. Elimination of middlemen: The cooperatives procures goods directly from the
producers and sell them directly to the consumers.
3. Equality: The co-operative societies are organised democratically on the basis
of equality and free association.
4. Moral improvement: The organisation is directly interested in the members
and takes steps for their improvement. Co-operation is supposed to teach
virtues of self sacrifice, discipline, honesty, fairness in dealings, mutual help
and self reliance.
The difficulties of co-operative organisation
1. There is a lack of incentives and initiatives: Every bodys business is nobodys
business.
2. It is difficult to enforce discipline among illiterate workers.
3. Business leadership is lacking in co-operatives.
4. Generally members lack in honesty. This limits the field of co-operation.

E. State enterprise
In modern times many undertakings are owned and operated by the
Government. In certain spheres the States intervention has become absolutely
necessary. Similarly they must protect the economically weak against the
economically strong. The organisation of state enterprise is on the same line as
private enterprise. But all the employees are Government servants and the capital
is provided from the state coffers and profits too, if any, goes to the state.
Merits of state enterprise
1. State can raise more capital and that too cheaply.
2. The government is in a position to command superior talent. There is certain
glamour for government service.
3. As a monopoly enterprise it enjoys several economies.
4. The profit is spent for the benefit of the community in general.
5. The employees feel a greater sense of security.
6. It reduces the inequalities in income and wealth.
Demerits of State enterprise
1. State enterprise when compared with private enterprise is not run and managed
efficiently.
2 Employees of the state organisation will not take any interest in running the
enterprises efficiently because he gets his pay regularly.
3. In government enterprises, there is red-tapism and lack of initiative.
4. Because of frequent transfers and appointments, the efficiency of enterprise
suffers much.
ORGANISATION IN AGRICULTURE
The following are the different types of organisation prevalent in
agriculture.

a) Peasant farming: This is the most common system of farming that is prevalent
in India. Here the lands are owned by the individuals. They are supplied with the
required inputs, cultivate and bear the risk of farming. There are three types of
land lords or land owners.
1. Cultivating land lords, who cultivate his own land.
2. Supervising land lord is one who does not work in the soil but supervises and
manages the farm with paid servants.
3. Absentee land lord is one who owns the land, resides away from the land and
the land is let to the tenants for cultivation. The tenants pay the rent to land
lords. The rent for the land may be paid in different forms. It is called
Kuthagai system where a definite amount or produce per acre is paid to the
land owner as rent for the land. This is also known as fixed rent. The other
form of paying rent is sharing of the produce which is known as varam
system or share rent. The sharing of the produce has been fixed by law at 40:60
between owner and tenants respectively (Tamil Nadu).
b) Capitalistic or Corporate or Syndicate or Estate farming
In this system a group of individuals join together and pool their land and
resources and carry on farming. They employ a manager to run the farm. This is
mostly prevalent in plantations. The development of this type of farming is seen in
a number of agro industrial farm that are coming up recently.
Questions for Review
Fill up the blanks:
1. If the value of M is greater than zero, then the country is said to be ------2. In partnership firms, ------- liability is followed, while in joint stock
company, --------- liability is followed.
3. The debenture holders are the companys -------- and they must be paid the
agreed rate of interest.
II Differentiate the following
1. Positive and preventive checks.
2. Land and capital.
3. Labour and capital.
4. Capital and money.
5. Capital and wealth.
6. Social capital and private capital.
7. Will to save and power to save.
8. Private company and public company.
9. Fixed input and variable input.
10. Share and debenture.
III Answer the following
1. What is capital formation? What are the different ways of capital
formation?
2. Explain the functions of an entrepreneur.
3. Explain the different forms of business organizations. Describe in detail the
merits and demerits of different forms of business organizations.