Factors of Production – Capital

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Factors of Production – Capital

Capital: Capital has been as that part of person’s wealth, other than land, which yields an income or which aids in the production of further wealth.

1) Capital and Wealth: The capital is required in production. In modern economy the production depends not only on land and labour but capital is also equally important. It is also important to note that if wealth is not used in production process it is not said to be a capital. For example, basically tractor is capital asset as it can be used in cultivation (production) of farm, but due to some reason the same is kept unused (idle) for one or two year it can not termed as capital for that particular year. It is only wealth. Thus, the unused wealth can not be considered as capital. Hence all capital is wealth but all wealth is not capital.

2) Money and capital:
In the ordinary language, capital is used in the sense of money. No doubt money is wealth and part of wealth used in production is called capital. But here in production process money is not used as such and hence it can not be termed as capital. Only by using money we are purchasing capital assets and hence money itself is not capital.

3) Capital is produced means of production: It is man made instrument of production. Just like land and labour, capital as factor of production is not original. Since it is man-made it is not freely available.

Characteristics of capital:

1) Capital is man made factor of production.
2) It involves time element.
3) Capital may be fixed: i.e. it is durable use pre use producer goods e.g. machinery, well in agriculture.

It may be working:
i.e. it is single use producer’s goods e.g. seed, fertilizer in agriculture.

Function of capital:

1) Supply of raw material: The working capital required in production process represents raw material.

2) Supply of appliances and equipment: The fixed capital goods.

3) Provision of subsistence: If capital is available to the poor person, he can utilize it and run his family very well. Supposes only 5 to 6 goats maintain by a poor person it will give him sizeable income to survive his family.

4) It also employment means of transport:

5)  Supply of employment: If ample supply of capital is made, it will enhance production which will in turn give employment.

Importance of capital:

  1. In modern economy capital is very important factor of production which is essential to undertake production.

  2. Without capital other factors of production (like land, labour) will become handicap.

  3. On the contrary, if apple supply-capital is made the production and productivity can be increased substantially.

  4. The economic development of any country does not solely depend upon the available land and labour but how much capital is made available is also equally important.

  5. The under-developed countries remained, under-developed due to lack of capital.

  6. The ample supply of capital gives boost to production.

  7. When more production is there, more economic activities can he initiated and as a result, more employment opportunities can be created.

  8. More employment further helpful for minimizing the poverty or improving standard of living of the people.


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