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December 8, 2022 

AmosWEB means Economics with a Touch of Whimsy!

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THE ECONOMIC PROBLEM: Another term for scarcity, which is the pervasive condition of human existence that exists because society has unlimited wants and needs, but limited resources used for their satisfaction. In other words, while we all want a bunch of stuff, we can't have everything that we want (see free lunch). In slightly different words, this scarcity problem means: (1) that there's never enough resources to produce everything that everyone would like produced; (2) that some people will have to do without some of the stuff that they want or need; (3) that doing one thing, producing one good, performing one activity, forces society to give up something else; and (4) that the same resources can not be used to produce two different goods at the same time. We live in a big, bad world of scarcity. This big, bad world of scarcity is what the study of economics is all about. That's why we usually subtitle scarcity: THE ECONOMIC PROBLEM.

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CAPITAL:

The manufactured, artificial, or synthetic goods used in the production of other goods, making capital the "produced" factor of production. This is one of four basic categories of resources, or factors of production. The other three are labor, land, and entrepreneurship. Capital makes labor more productive.
Capital includes the manufactured (or previously produced) resources used to manufacture or produce other goods. Common examples of capital are the factories, buildings, trucks, tools, machinery, and equipment used by businesses in their productive pursuits. Capital's primary role in the economy is to improve the productivity of labor as it transforms the natural resources of land into wants-and-needs-satisfying goods.

Physical and Financial

First and foremost, note the difference between physical capital and financial capital.
  • Physical capital is the tangible items used for actual production, including factories, buildings, trucks, tools, machinery, and equipment.

  • Financial capital, in contrast, is the legal claims on the ownership of physical capital. Such legal claims usually take the form of paper documents or electronic computer entries. For example, corporate stock (a well-known type of financial capital) is the ownership of a corporation's factories, buildings, and equipment.
Financial types generally use the term "capital" when referring to the financial capital, while economic types are more inclined to use the term for physical capital. Because financial capital represents ownership of physical capital, the dual use of this term is logical and appropriate.

Categories of Capital

Factories and equipment usually come to mind first when the discussion turns to (physical) capital. Physical capital, however, includes a hodge-podge of productive assets. The hodge and the podge can be better seen by separating capital into four different categories--inventories, equipment, fixed structures, infrastructures. These categories are different both in use and the time required for production. Consider examples of each category for the hypothetical Shady Valley restaurant, Manny Mustard's House of Sandwich.
  • Inventories: Also commonly termed working capital, inventories are the raw materials, intermediate goods, and finished products that smooth production uncertainties and let producers fill sales orders in a timely fashion. The meat, bread, and condiments that Manny Mustard's House of Sandwich has on had to prepare sandwiches are examples of inventories.

  • Equipment: This includes the tools, machinery, vehicles and other "moveable" productive capital that is not "permanently" attached to the land. Equipment is an extremely diverse grouping, ranging from hand-held screwdrivers to 18-wheel tractor-trailer trucks. The tables, chairs, counter, and cash register in Manny Mustard's House of Sandwich fall into the equipment category.

  • Fixed structures: All sorts of buildings--factories, warehouses, office buildings, shopping malls, residential homes, apartment complexes, and hospitals--are part of this category of capital. Basically anything with four walls and a roof would be included. The building that houses Manny Mustard's House of Sandwich is an example of a fixed structure.

  • Infrastructure: Infrastructure includes assorted transportation systems that move people, materials, goods, information, or energy around, including streets, highways, bridges, railroads, airports, waterways, sewage systems, telephone systems, and electrical distribution systems. Many of these are public utilities, either owned and operated by government or if privately owned, heavily regulated by government.The street used by customers to visit Manny Mustard's House of Sandwich is infrastructure.

Business Cycles

The length of time required for production of each capital type plays a key role in business cycles and macroeconomic instability. In the grand economic scheme of the aggregate economy, inventories can be produced (or acquired) quickly, equipment takes a little longer, fixed structures are even more time-consuming to produce, and infrastructure takes the longest of the four. Standard four-year business cycles are generally associated with inventories. Longer-term instability is often attributed to the other capital types.

The Investment Tradeoff

One of the more important economic aspects of capital is the fundamental tradeoff between the production of capital goods and the production of consumption goods. Consumption goods provide current satisfaction of wants and needs and capital goods are productive resources used to produce other goods. Producing more capital goods and fewer consumption goods is the basic act of investment and the primary means of achieving economic growth.

Human Capital

Before closing this entry on capital, one remaining type of capital needs to be acknowledged, human capital. Human capital is the knowledge, experience, and training that make labor more productive. As a "produced" resource, it is conceptually comparable to standard physical capital. The primary difference is that human capital involves the transformation of a human, whereas physical capital involves the transformation of nonhuman materials.

CAPITAL ACCOUNT, BALANCE OF PAYMENTS =>


Recommended Citation:

CAPITAL, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: December 8, 2022].


Check Out These Related Terms...

     | factors of production | labor | land | entrepreneurship | resource allocation | economic resource |


Or For A Little Background...

     | scarcity | limited resources | economics |


And For Further Study...

     | capitalism | second estate | ownership and control | privatization | property rights | private sector | production possibilities | investment, production possibilities | economic growth | economic growth, production possibilities | investment | fixed input | capital consumption adjustment | capital depreciation | short-run production analysis | returns to scale | corporate profits | gross private domestic investment | investment business cycles |


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