CAPITAL– MEANING AND CHARACTERISTICS

Capital means different things to different people.

Capital is defined in economics as the portion of man-made wealth put aside for the production of goods and services.

Economists also defined capital as man-made and physical resources used in the production of goods and services.

In commerce, capital refers to the finance of a company, business entity or government agency.

In accounting, Capital refers to the amount invested in a business.

Capital can also refer to the financial assets of a business.

We generally think of capital as consisting just of money. This, however, is not the case.

As a factor of production, capital also refers to assets such as machinery, equipment, and raw materials that are used in the production of goods and services.

Capital is a concept that is linked to three terms: wealth, income, and money.

Relationship between capital and wealth

Capital is that part of wealth used in the production of goods and services

This means that while all capital is wealth, not all wealth is capital.

Relationship between capital and income

Capital serves as a source of income and individuals earn good income when enough capital is invested.

For example, a beer parlour owner's refrigerator is a capital, but the profit he makes from the business is his income.

Relationship between capital and money

Capital is generally assumed to be a monetary investment in business activities.

Capital refers to not just the initial investment in a company, but also subsequent investments in the company.

However, it must be noted that money, by itself, is not capital.

It is only when money is used to acquire real capital goods such as equipment and machinery that it becomes capital.

This perhaps explains why money in the hands of a consumer is not considered a capital

Characteristics of capital as a factor of production

1. Capital is a man-made factor: Capital is not a gift of nature like land.

Rather, capital is a man-made factor of production.

This is because equipment and machinery are made by human beings and designed to work in a particular manner.

Indeed, the supply of capital is controlled by human efforts

2. Durable: Unlike labour, which is perishable, Capital is long lasting.

Although capital lasts a long time, it is subject to depreciation.

For example, a machine can be used for 10 years but will be depreciated every year.

3. Capital increases the productivity of labour: Although labour is an active factor of production, it is not as useful without sufficient capital.

If a person is given the right machines and equipment to work with, his productivity will be greatly enhanced.

4. Capital is highly mobile: Capital has the highest mobility of all the factors of production because it can easily move from one location to another. 

5. Capital is a passive factor of production: Just like land, capital is a passive factor of production as it is useless without the support of other factors of production like labour and entrepreneurship.

No company can start production with just  capital, it must employ people (labour)

6. Capital is highly elastic: The supply of capital is highly elastic to changes in price and demand.

7. Capital is variable: Unlike land, where supply is fixed, capital can be increased or decreased through savings and investment.

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