Capital

CAPITAL Dewett – 145/148

CAPITAL - MEANING • Capital has been defined as that part of a person’s wealth, other than land, which yields an income or which aids in the production of further wealth. • If wealth is left unused, it cannot be considered as capital. • Capital serves as an instrument of production and anything which is used in production is capital.

IS MONEY CAPITAL? • Money is a foam of wealth and it yields income when it is lent out. But it cannot be called capital. Capital is a factor of production, but money as such does not serve as a factor of production. With money we can buy machinery and raw materials which then serve as factors of production.

ARE SECURITIES AND SHARES CAPITAL • The above possessions yield income to him. But they cannot be called capital because they represent only titles of ownership rather than factors of production

• Capital has also been defined as “ produced means of production”. This definition distinguishes capital from land and labor as both are not produced factors. Land or labor are considered as primary or original factors of production. But capital is not primary or original factor, it is produced factor of production. • Capital consists of those physical goods which are produced for use in future production. Machines, tools and instruments, factories, canals, dams, transport equipment, raw materials etc are examples of capitals. All of them are produced by man to help production of further goods.

Characteristics of Capital • Capital is man made- it is therefore possible to increase its supply when the situation requires • It involves the element of time- it renders its service over a period of time • Efficiency – its application increases the efficiency and productive powers of all sectors

FIXED & WORKING CAPITAL • CAPITAL is divided into fixed capital and working capital. • Fixed capital are durable-use producer goods which are used in production again and again till they wear out. Machinery, tools, railways, tractors etc are fixed capital • Working capital includes the single-use producer goods like raw materials, good in process, fuel etc. they are used in single act of consumption. Moreover, money spent on them is fully recovered when goods made with them are sold out.

WEALTH & CAPITAL • CAPITAL consists of valuable economic goods which are scarce. Such goods are called WEALTH in economics. • All capital is wealth, but all wealth is not capital • Only that part of wealth, which is used productively, is CAPITAL • The car which is used for personal enjoyment is wealth but not capital

IS LAND CAPITAL? • LAND is a free gift to man, it is limited in area and is of infinite variety. • But CAPITAL is man made, can be increased at will. • Land lacks mobility where as capital is fairly mobile. • Supply of capital varies with price. When rent falls land cannot be withdrawn • So land cannot be considered as CAPITAL

FUNCTIONS OF CAPITAL • • • • •

Supply of raw materials Supply of appliances and machinery Provision of means of transport Provision of employment Provision of subsistence ( laborers must have food, clothes and lodging) • In fact, production would almost come to a stand-still without adequate and suitable supply of capital

IMPORTANCE OF CAPITAL • Essential for production • Increases productivity • Importance in Economic Development • Creating Employment Opportunities.