The nature of

production
 Capital

Capital as a factor of production describes resources that are necessary for

the further production of consumer goods or services. A good with the
following features is considered to be capital:
1. It can be used in the production of other goods (this is what makes it a
factor of production).
2. It is man-made, in contrast to land or naturally occurring resources
such as geographical locations and minerals.
3. It is not used up immediately in the process of production.
Capital is usually denoted as machinery or tools which are used in
combination with labor for the purpose of making goods. There can be
fixed or circulating capital. The former relates to goods such as buildings
or machinery, while the latter refers to the stock of goods that a firm has
ready for use in the future.
 Capital goods and consumer goods

Capital goods are not wanted for their own use or satisfaction. By contrast,
consumer goods provide direct satisfaction, e.g., a motorcar, stove, washing
machine or sewing machine. If, however, these goods are used to provide a
paid service, they then become capital goods. Hence, the nature of the item
itself is not what makes it a capital good or a consumer good: it is the uses to
which it is put that will determine this.
 Types of capital
Capital may be divided into physical capital and social capital.

•1. Physical capital consists of fixed and working capital.

 Fixed capital usually refers to capital which is long-lasting and which does not change its form
during the course of production, such as factories, oil rigs, snow cone machines, tractors.
 Working capital is changed in the course of production, for example raw materials, plant seeds,
fertilizer, shoe leather, cotton.
 Financial capital refers to the money capital which the company uses to run its day-to-day
operations. Financial capital consists of loan capital and share capital. Financial capital may also
be considered as working capital.
Social Capital:

• Apart from private investment there is also public

investment. This takes the form of government expenditure
on factories, plant and machinery or on roads, bridges,
airports, port utilities and power supply. These are called
social capital. House building is also included in this category.
The role of capital in a country

• For investment to take place, it has to be

financed. One of the ways to finance expenditure
on capital is from savings in the bank, which are
loaned to entrepreneurs.
Financed affecting the volume of capital are:

 The rate of interest

 The expectations of the business sector
 The rate at which capital wears out (depreciation)
 The state of the economy-during a boom more investment takes place
 Government action-if lower taxes are imposed on profits, firms tend to use profits to invest
 The cost of capital in relation to labor, and whether capital can be substituted for labor
The entrepreneur

•Although land, labor and capital have traditionally been considered the factors
of production, economists have argued that without the entrepreneur there is no
one to organize them into a productive unit. Decisions on what, how, for whom
and where to produce are taken by the entrepreneur. The entrepreneur links land,
labor, capital and pays rent to land, wages to labor, and interest to capital.
The functions of an entrepreneur are:

To take risks by entering the marketplace in order to supply goods and
services
To raise finance before production begins
The employ, coordinate and reward the factors of production for their
resources
To ensure that the factors or production are used in the correct proportion.