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

The perishable nature of capital

All capital goods are perishable. The few products that are not perishable but permanent become, to all intents and pur­poses, part of the land. Otherwise, all capital goods are perish­able, used up during the processes of production. It can be said that capital goods are transformed into their products during production.

Some capital goods are used up in each production-event. Other capital goods are also used up, but not as suddenly; they may last many years. Each particular capital good has a different useful life and therefore a different rate of depreciation, of being used up.

Capital consumption

Because capital is perishable, it must be renewed, if man wishes to enjoy the fruits of higher production. Saving must be repeated over and over, capital could break down and be replaced in whole or be repaired and kept in shape.

Man can avoid the trouble of saving and enjoy a higher consumption now. But if the capital is not replaced, production will later drop. Instead of saving and maintaining capital structure, capital is consumed. In this case, time preference has led man to prefer more present consumption, in exchange for greater losses in fu­ture consumption.

External links

• Capital on Wikipedia