CAPITAL

Capital refers to all man-made resources such as tools and other resources used for production of goods and services. It includes all those goods (items or commodities) which are used for further production of more goods, e.g., machines, tools, factory buildings, transport equipment, etc.Capital can be grouped into fixed and working capital.

a) Fixed capital comprises of those resources which have a longer lifespan.

b) Working capital refers to the capital available for conducting day-to-day operations of an organization. For example, raw materials or stock of goods have a shorter lifespan.

The reward for capital is interest earned. This is the amount paid to contributors of capital to reward them for investing.

CHARACTERISTICS OF CAPITAL

Important characteristics of Capital are as follows:

1. Capital is a passive factor:

It is a passive factor of production. This is so because it becomes ineffective without co-operation of labour.

2. Capital is man made:

It is created by man. Its supply is increased or diminished by the efforts of man.

Food for thought. According to John Stuart Mill, capital is the “accumulated product of past labour destined for the production of future wealth”, i.e., when human labour is applied to natural resources, then capital items are generated.

3. Capital is not an indispensable factor of production:

Production can be possible even without capital, whereas, land and labour are the original and indispensable factors of production.

4. Capital has high mobility:

Amongst all the factors of production, capital has the highest mobility. Capital can move from one place to another hence it is geographically mobile. Capital can be put into various uses too, hence it is occupationally mobile. 

NOTE: The land is immobile, labour has low mobility, whereas capital has both place/geographical mobility and occupational mobility.

5. Capital is elastic:

Supply of capital is elastic and can be adjusted easily and quickly according to demand.

On the other hand, the supply of land is fixed and the supply of labour can neither be increased nor decreased quickly.

6. Capital depreciates:

Capital can reduce in value if it is used again and again because it is subject to depreciation. For example, if any machine is used for a considerable period, then it may not be suitable for further use due to depreciation.

7. Capital is productive:

Production can be increased to a large extent if workers work with adequate capital.

8. Capital is temporary in nature:

Capital has to be reproduced and replenished from time to time.It can be improved due to advancement in technology.

9. Capital is not a gift of nature:

Production of capital involves some cost as it is not a natural gift, and is not freely available. It is a man-made resource. It is earned with hard labour and sacrifice.

10. Capital is prospective:

Capital is considered much prospective, as the accumula­tion of capital yields an income.

11. Capital is the result of past savings:

In some cases when the consumption of capital good is not simultaneous with the production, it becomes a saving, e.g., when a farmer does not consume or sell a part of his crop production, it can be used as seeds in the future.

12. Capital is an essential factor of production.