Capital

Capital are the goods, that were produced by previous stages of production, but do not directly satisfy consumer's needs; they are used in production to eventually produce consumer goods.

The Formation of Capital

In the simplest example of an economy (the "Robinson Crusoe economy"), a person can spend time producing consumer goods and consuming them. In order to produce capital goods, he must save, i.e. consume less than his means allow in the present. With capital, he can produce more and and so consume more in the future.

The creation of capital goods is called investment.

Capital in Production

Capital makes the production process more "roundabout"; in general are these methods are more productive than shorter, more direct methods. An actor will opt for longer, more roundabout methods so long as the enhanced output more than offsets the increased waiting time, which in itself is a disadvantage because of time preferences.

With­out the aid of capital, only goods with the shortest period of production are available. Goods with longer periods of production are not available unless capital goods are acquired.

There are two ways in which longer processes of production through the use of capital may increase productivity:

1. by making possible a greater production of the same good per unit of time; or
2. by making possible the production of consumer goods that were not available at all with a shorter process of production