Economics: Basic Economic Activities: Production, Factor Incomes, Consumption and Capital Formation (For CBSE, ICSE, IAS, NET, NRA 2022)

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Production, consumption and capital formation are called the basic economic activities of an economy. Scarce resources are used in the production of goods and services with the objective of satisfying our needs and wants. The process of production of goods and services is carried by combining the factors like land, labour, capital and entrepreneurship. Whatever is produced is disposed of either for consumption or for capital formation or both.

Basic Economic Activities


The scarce resources are used in the production of goods and services. The goal of production is to satisfy our wants. These goods and services produced can be sold in markets or can be provided by the government to public at nominal charge. Therefore, Production is defined as creation of utility. Production activities involve making of goods and services. There are various factors of production which are as follows:

  • Land: Land is a gift of nature. It includes plain region, mountains and plateau region Some amount of land in the plain region is specially developed to establish industries and urban areas such as towns and cities.
  • Labour: In general, labour implies the human effort through physical and mental exertions in the production of goods and services. People who provide labour are known as human resources.
  • Capital: By capital, we mean all man-made appliances and all types of wealth used in production. Capital is used to increase the efficiency of other factors of production like land or labour. Tractors, ships are all examples of fixed capital, as they can be used in production for many years. The working capital includes raw materials like cotton yarn, clay, seeds, fertilizers, which are used up in the process of production.
  • Entrepreneurship is the art of organizing the production activity. The person who makes the decisions and controls the production process and bears the risks and uncertainties involved in production is called an entrepreneur. The objective of an entrepreneur is to get maximum production by using the given resources and make arrangements for the sale of the finished products.

Factor Incomes

The factors of production are owned by people. Land is owned by the landlord, labour is owned by labourer, capital is owned by people who acquire capital goods, entrepreneurship is owned by the entrepreneur. The owners of factors of production are paid in return for their productive services. As they are paid in return to their productive services, they are called factor payments and their incomes are called factor incomes.


The objective of production is to produce goods and services for consumption. The consumption activity consists of the use of goods and services for the direct satisfaction of individual or collective human wants or needs. There is no time gap between the production and consumption of services. In case of services production and consumption take place simultaneously. There is a time gap between the production and consumption of goods. Goods are considered to be consumed when they are purchased.

Capital Formation

Factor owners get factor incomes in return for their productive services. They spend a large part of their incomes on goods and services as per their requirements. However, they do not spend whole income on goods and services, they save some income and deposit the same in bank for future necessities The bank, in turn, may use this money to lend an industrialist to invest in the expansion of his business. Capital formation is done by refraining from present consumption.

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