Production refers to the output produced by a company. It decides the profit and growth of that particular company. However, to get products or output, we need some input. The inputs to the company are land, labour, entrepreneurship, and the most crucial resource: capital. With the capital, we can get other inputs too. So capital as a factor of production plays a significant role. Now, what is capital? Let us see the meaning of capital in Economics. In any kind of organization, capital refers to the machinery, assets, labour, land, money, etc.
In simple words, we can say that the factors that drive the production of goods or services, is capital.
Types of Capital in Economics
An essential input for any production is capital. So it is important to understand the types of capital in economics. Many economists have classified the capital in various ways. Let us take a look at the general classification.
Financial Capital
Debt
Equity
Working capital
Investment
Natural Capital
Animals
Ecologies
Vegetation
Commodities
Human Capital
Social
Physical
Intellectual
Technical
These are the various types of capital in economics. Every organization needs the capital of these kinds. Choosing the capital correctly helps the owner to reduce risk and increase return because all businesses are established with a motto of earning profit and goodwill, including good returns.
Capital as a Factor of Production
An organization can work only with the help of capital. So before going to explain capital as a factor of production, we will take a glance at the attributes of capital as given below.
Capital is termed as wealth.
Capital is durable.
Capital is not a natural resource.
Capital is a passive factor.
Capital is not static. It may vary based on supply and demand.
Capital is destructible.
Capital may depreciate in the beginning and increase while growing on like during the expansion of the company.
Capital can yield all the factors of production.
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As capital is an inevitable factor of production, organizations need to search for various sources of capital. Let us find out the ways to develop capital for production.
Investment: Investment is the primary source at the initial stage of any kind of company. With some liquid assets, the owner can purchase other resources that are helpful for the process of production.
Mobility of Savings: It occurs in the case of multiple businesses. The savings of one firm will move to another, and so on.
Growth of Savings Level: Here, the growth of the organization varies from the growth of savings level. If the income level increases to 10%, one should try to increase the savings level so that it can act as capital for production.
For every organization, we need various resources. Even though every resource has its significance, capital is an essential resource that can be generated by man. We cannot produce labour, land, or raw materials. They are mostly derived from natural resources. Whereas, we can buy the equipment, machinery, other inputs needed for production using the capital. Capital can be arranged by man and it is the man-made resource for production. That is why it is considered as the wealth of an organization.
Capital, A Factor of Production: Example
Let us consider an example to get a clear idea of the importance of capital. We will derive the capital as the factor of production.
Let us assume that you are going to start a cold drink company. You need the necessary source of water. So you search for land near water bodies. You also require machinery, vehicles to transport, labour to work, money to install a plant, etc. Except for water, every source needs to be purchased using money by man. Even labour is not a man-made resource, and with money, you pay their wages.
Thus, we can run an organization with several resources, but capital occupies a significant part among them. Hence we can say that capital is a factor of production. As it has high priority, one should know the meaning of capital in Economics, the types of capital in Economics, and the features of capital too before beginning any kind of business. A prior knowledge always yields the best results as capital is the essential wealth and asset of a firm.
FAQs on Capital as a Factor of Production Explained
1. What are the four main factors of production in economics?
The four fundamental factors of production are the resources used to create goods and services. They are:
- Land: This includes all natural resources, such as soil, water, minerals, and forests, used in the production process.
- Labour: This refers to the physical and mental effort exerted by humans in production.
- Capital: These are man-made goods used to produce other goods, such as machinery, tools, and factory buildings.
- Entrepreneurship: This involves the individual who combines the other three factors, takes risks, and makes key business decisions.
2. What is capital as a factor of production? Provide some examples.
In economics, capital refers to the man-made, durable goods that are used in the production of other goods or services. It is not money itself, but the physical assets that money can buy to generate income. Examples of capital include:
- Machinery in a factory
- Computers and software in an office
- Delivery trucks for a logistics company
- Tools used by a carpenter
- The physical building of a school or hospital
3. What are the main types of capital used in production?
Capital is primarily classified into two main types based on its usage in the production cycle:
- Fixed Capital: This includes durable assets that can be used repeatedly over a long period, such as buildings, machinery, and vehicles. They are not consumed in a single production cycle.
- Working Capital: This refers to the single-use producer goods like raw materials and the funds required for day-to-day operations (e.g., paying wages, electricity bills). It gets used up or converted during the production process.
4. What is the importance of capital in the production process?
Capital is crucial for modern production because it significantly enhances productivity and efficiency. Its key importance lies in:
- Increasing Productivity: Tools and machinery allow labour to produce more goods in less time.
- Enabling Large-Scale Production: Capital makes mass production possible, which often lowers the cost per unit.
- Creating Employment: The formation and use of capital in industries generate jobs for workers.
- Driving Technological Advancement: Investment in new capital often involves adopting new and more efficient technology.
5. Why is capital considered a "produced" means of production?
Capital is uniquely called a produced means of production because unlike land, which is a gift of nature, capital must first be created by humans. A machine, for example, is the output of one production process (manufacturing the machine) that then becomes an input for another production process (using the machine to make clothes). This distinguishes it from primary factors like land and labour.
6. What is the key difference between labour and capital as factors of production?
The primary difference lies in their nature. Labour is the human effort and is inseparable from the person providing it. It is an active factor that uses capital. In contrast, capital consists of inanimate, man-made objects (like tools and equipment) that are owned. Capital is a passive factor that needs labour to operate it. Furthermore, a day's labour not used is lost forever, whereas capital depreciates over time but is not lost if unused for a day.
7. How is capital different from wealth?
This is a common point of confusion. The key distinction is usage. Wealth refers to the total stock of valuable assets an individual or nation owns. Capital, however, is only that part of wealth which is actively used to produce more wealth. For example, a personal car is part of your wealth. If you use that same car as a taxi to earn an income, it becomes capital. Therefore, all capital is wealth, but not all wealth is capital.
8. How does an entrepreneur utilise the other factors of production, including capital?
An entrepreneur acts as the catalyst of the production process. They are the organisers who bring the other factors together in a productive combination. Specifically, an entrepreneur decides:
- How much capital to invest in the business.
- What kind of capital (machinery, technology) to acquire.
- How to combine that capital with the right amount of land and labour to efficiently produce a good or service and generate profit.
