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Home Money Capital in Economics: Definition, Characteristics and Importance

Capital in Economics: Definition, Characteristics and Importance

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You may be eager to know what is capital, especially in economic terms. The definition of Capital is “All man-made goods used to produce wealth”. It includes equipment, tools, machinery, railways, buildings, means of communication & transport, raw materials, etc. It is rather the result achieved through human efforts on natural resources. Even government bonds, shares, securities & stocks, etc. are included in capital, since it yields income to investors.

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Capital in economics – Characteristic features

characteristics of Capital

  • Man-made: Man has created Capital. It is his efforts that have helped increase or reduce its supply. Capital can be stated as ‘product accumulation of past labor to be used to produce future wealth’. Capital items are created by applying human labor to natural resources.
  • Passive factor: For production, it is referred to as a passive factor, since without labor cooperation, it is ineffective.
  • High mobility: Capital money is stated to enjoy greater mobility amongst all production factors. Labor comes with low mobility and land is immobile, while ‘capital’ is said to have both ‘occupational’ & ‘place’ mobility.

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  • Not indispensable production factor: It is possible to produce even without having capital. The indispensable & original production factors comprise of labor & land.
  • Depreciates: Capital depreciates when used repetitively. If the machine gets used for a long time, then depreciation may result in its not being used further.
  • Elastic: Capital supply is elastic. It can be quickly & easily adjusted based on prevailing demand, while the land is fixed. On the other hand, it is not possible to decrease or increase labor supply quickly as desired.
  • Temporary: Capital in finance needs to be replenished & reproduced periodically.
  • Productive: With adequate capital in hand, it is possible to increase production as desired.
  • Prospective: Since capital accumulation yields income, it is regarded as a prospective.
  • Not regarded as Gift of Nature: Capital production does involve some cost and hence, not considered as a gift of nature. It is also not available freely and needs to be earned with sacrifice & hard labor.
  • Resulting from past savings: If capital good consumption does not take place simultaneously with production, then it is termed as saving. For example, a farmer may not be interested to sell his crop production or consume it. He may then use the seeds to grow crops in the future.

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Capital in economics – Importance

Importance of capital in economics

  • Core to economic development: Capital does play a significant role to increase productivity. Hence, it occupies an important place in the economic development process. Without adequate capital money, no country or company can grow or survive.
  • Helps increase productivity & production: It is simply impossible to imagine a production without capital. Labor & land cannot be used to produce goods if there is a lack of equipment, tools & machines. Capital in finance is presently occupying the top slot, especially with the advancement of science & technology leading to specialization. Capital can improve productivity & overall efficiency.

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  • Employment opportunities: There is necessary adequate capital stock increase with an increase in population in a country. This is crucial to offer employment opportunities to increase the labor force. It could be that an increase in capital stock, like increase in factories, tools, machines, etc. is insufficient. It may also not be able to keep proper pace with the rise in working labor. In such a case, unemployment is likely to increase significantly. Hence, capital is necessary to provide people with more employment opportunities.

From the above, you can get to know what is the capital & its significance in Economics. You will require capital to take your business to the next level.

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