[Commerce Class Notes] on Factors of Production Capital Pdf for Exam

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.

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.