Short notes on Capital as a factor of production

Capital as a factor of production is defined as man-made wealth which is used in the production of goods and services. Money, in itself, is not capital. It merely permits the purchase of capital goods (money may also be used for the purchase of consumption goods). An increase of money in an economy will not increase the capital of an economy; in the absence of an increase in the supply of goods and services, prices will merely rise. Money is a store of wealth and can be exchanged for capital goods and only to this extent can money be considered as capital in the factor of production sense. Capital goods (known also as producer goods) are goods, e.g. factories, industrial plant and machinery, which are used for the production of other goods. Capital goods are sometimes referred to as intermediate goods in recognition the fact that the end product of the industrial process is consumer goods and capital goods are merely a means towards this end. The demand for capital arises because of the contribution which capital makes to production. Productivity can be increased through the use of capital goods. Machinery can work faster and more accurately than labour and using a machine can release labour for other jobs. But in countries where the cost of labour is low, it may be more economic to use labour to produce the good than to use labour to make a machine to make the good. But sometimes, a good can only be made by a machine, so capital goods will always be present to some extent.

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