Meaning of Capital

Capital includes all man-made resources that are used in the production of other goods and services. Raw materials, buildings, machines, tools, roads, bridges, means of transportation, books, pens, copies, etc., are examples of capital. When a farmer produces wheat, if they use a portion of the wheat they produce as seed, then it is capital. If they use that wheat as food, then it cannot be considered capital. Therefore, capital includes only that portion of wealth that is used in the process of reproduction.

Characteristics of Capital

(a) Capital is a man-made resource: Humans have labored to produce goods like buildings, books, machines, food grains, roads, cotton. These goods cannot produce themselves. Capital formation is impossible without human labor. Since capital can be formed from the labor of workers, it can be said that a characteristic of capital is that it is a man-made resource. Additional goods can be produced through its use.

(b) Capital is a passive factor of production: All capital goods such as machines, tools, industries, buildings, fertilizers, seeds, raw materials are brought into use by humans. If not used, these resources cannot produce on their own and will perish. To get additional production from the use of capital, humans must use it skillfully.

(c) Capital is a dynamic factor of production: Machines, equipment, raw materials, fertilizers, seeds can be moved from one place to another as needed. Therefore, capital is a dynamic resource.

(d) Capital is perishable: No capital goods are permanent. After being put into use for some time, they wear out, break, or become damaged and unable to produce.

(e) Capital formation depends on savings: Suppose a producer produces fifty muris of paddy in a year and consumes all of it. Then there can be no savings. If there are no savings, investment cannot be made. If there is no investment, additional production cannot occur. 

But if they consume twenty-five muris of paddy and save twenty-five muris, then by selling it and converting it into money, they can spend it on other productive work, or use it as seed, or use it for other purposes. In this case, capital formation is possible. The primary basis of capital formation is savings.

(f) The supply of capital is elastic: Suppose an industry needs more raw materials, and demand increases. Then the supply of raw materials can be increased. Similarly, if the demand for raw materials decreases, the supply can also be decreased.