CAPITAL: Capital is defined as the man made assets used in production. It is the man made wealth used in the production of other goods. The reward for capital is “INTEREST”.

Capital as factor of production includes all material resources (excluding land) or stock of wealth used productively. The meaning of Capital in economics is more precise and restricted than its meaning to a businessman or an accountant. A stock of money, shares in a company or a private hoard of consumer goods is not capital.

Capital is used in all production except the most primitive form. A spade is capital to a market gardener. Machinery, factories, railways, roads, producers’ stock of material, equipment and partly finished or finished goods are all capital.

Features of Capital

  • Capital is man made
  • Capital is durable
  • Capital exist in different forms
  • It promotes division of labour
  • Capital exist in different forms
  • Can be created by an excess of production over consumption.
  • Must be maintained because it deteriorates with age and use.
  • A proportion of the value of land is capital factor of production due to additions of fertilizers, fencing, drainage.
  • Yields an income in the form of improved production.
  • Is mobile in the long run, but specific moderately.
  • Must be represented by savings.
  • Ownership can be separated from control of its uses.
  • Round-about process of production makes stocks in warehouses and shops capital.

Physical or Tangible Capital:

The material things which are used as inputs in the production of future goods are called tangible capital. The major categories of tangible capital office buildings, power plants, factories, ware-houses, machines, inventories of inputs, roads, highways, etc.

Intangible Capital:

Intangible capital consists of non material things that contribute to the output of future goods and services. For example, investment by a firm in advertising to establish a brand name, or establishing a training programme for employees to increase their still (human capital) is an input and so included in capital.

Functions of Capital:

Capital occupies an important position in determining the rate of economic development in the country. The main functions of capital, in brief, are as under:   

(i) Capital provides equipment which help in the process of economic development.

(ii) An increase in the stock of capital goods like machinery factories, equipment, buildings, economic overhead capital (transport, railroad, communication, etc) and equipment for education, health, shelter etc., enhances the growth of output per capita and consequently the income per capital raised.

 (iii) The accumulation of capital makes the labor better equipped and delays the operation of law of diminishing returns in agriculture and industry to a great extent.

 (iv) Capital determines the quantity and also the composition of output in the economy.              

(v) Capital puts the economy on the path to development. It results, in technological discoveries.

(vi) The availability of capital helps in the creation of employment opportunities in the country.

(vii) Capital adds value to the products.    

(viii) An increase in the stock of capital once initiated feeds on itself. The process of capital formation thus becomes interacting and cumulative.

Assessment

Mention 4 characteristics of Capital as a factor of Production

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