what is capital, types of capital and importance of capital
What is capital, types of capital and importance of capital
Capital may be defined as man made assets used in production. In other words capital refers to man- made wealth
CAPITAL AS A FACTOR OF PRODUCTION
Capital as a factor of production. What is capital?
Capital may be defined as man made assets used in production. In other words capital refers to man- made wealth or goods used to produce other goods and services. It may also be defined as the stock of previous wealth invested in order to produce future wealth
Capital, when properly combined with other factors, produces goods and services.
Examples of capital are physical cash, cutlass, hoe, machines, buildings, motor vehicles, raw materials, semi-finished goods, tools and other equipment used in the production of goods and services.
The reward for capital is interest.
Characteristics or features of capital
Capital is man-made: Capital in all forms is made by man before it can be used for production of goods and services.
Capital is durable: Capital generally are durable assets, which can be used for production.
Capital exists in different forms: Capital may be physical like building, motor vehicles, plants and other machinery or liquid like cash or money.
Capital is subject to depreciation: Capital in most cases is subject to depreciation, especially physical assets like motor vehicles, buildings, plant and other machinery.
It ensures large scale production: The existence of enough capital assists firms to embark on large scale production of goods and services.
It promotes division of labour: The availability of enough capital helps to promote the practice of division of labour in many companies.
Types of capital
The different types or forms of capital include the following:
Fixed capital: These are assets which are not used up in the course of production.
include those durable assets of a business that can last for a very long time. These assets or capital do not change their form in the process of production. Examples of fixed capital are land, buildings, tools, motor vehicles, plants and machinery.
Circulatory or working capital:
These are assets which are used up in the course of production. These consist of capital goods which either change their form or are used up in the process of production.
Examples of working capital include raw materials, water and fuel.
Current or liquid capital:
Current capital is the type of capital that are required for the day-to-day running of productive activities. They are also changed from one form to another. Examples are finished goods and money.
This includes those forms of capital or assets provided by the government that aid production.
Examples of social capital are amenities provided by the government which are roads, electricity, water and telephones.
These amenities, when they are readily available, aid the process of production.
Importance of capital
Capital facilitates production: Availability of adequate capital to any business outfit helps in mass production of goods and services.
Capital boosts efficiency: Availability of capital to a business enterprise boosts efficiency because more machines are used in production rather than by manual labour
It assists in location of industry: The availability of social capital like electricity, goods roads and water assists to a large extent the location of a particular industry.
It also affects the size and nature of the industry to be so located
It increases standard of living: Acquisition of capital by either individuals or governments helps them to have assets and other properties that aid or promote standard of living
Production of quality goods: The availability of capital to any firm aids the production of quality goods and services as a result of the purchase of modern machines.