A capital good is a durable good (one that does not quickly wear out) that is used in the production of goods or services. Capital goods are one of the three types of producer inputs, the other two being land and labor, which are also known collectively as primary factors of production. In the study of economic systems and in Marxian economics, the term means of production is often used with the same meaning as capital goods. This classification originated during the classical economic period and has remained the dominant method for classification.
Contents
- Differences between capital and consumer goods
- The importance of capital goods
- Investment required
- References
Capital goods are acquired by a society by saving wealth which can be invested in the means of production. In terms of economics one can consider capital goods to be tangible. They are used to produce other goods or services during a certain period of time. Machinery, tools, buildings, computers, or other kind of equipment that is involved in production of other things for sale represent the term of a Capital good. The owners of the Capital good can be individuals, households, corporations or governments. Any material that is used in production of other goods also is considered to be capital good.
Many definitions and descriptions of capital goods production have been proposed in the literature. Capital goods are generally considered one-of-a-kind, capital intensive products that consist of many components. They are often used as manufacturing systems or services themselves.
Examples include battleships, oil rigs, baggage handling systems and roller coaster equipment. Their production is often organized in projects, with several parties cooperating in networks (Hicks et al. 2000; Hicks and McGovern 2009; Hobday 1998). A capital good lifecycle typically consists of tendering, engineering and procurement, manufacturing, commissioning, maintenance and (sometimes) decommissioning (Blanchard 1997; Hicks et al. 2000; Hobday 1998; Vianello and Ahmed 2008).
Differences between capital and consumer goods
One should distinguish capital goods from consumption, as the aim of their purchase is different from the production of things. An example of it is a good car, that is normally considered to be a consumer good as it is bought for a private usage. Nevertheless, dump trucks used by manufacturing or constructing companies are obviously production goods. The reason is that they assist in creating things like roads, dams, buildings or bridges. The same way, a chocolate candy bar is a consumer good, but the machines that are used to produce the candy would be considered production goods. Some of the capital goods can be used in both production of consumer goods or production ones, such as machinery for production of dump trucks. It is generally considered that the consumption is the logical result of all economic activity, but it is also obvious that the level of the future consumption depends on the future capital stock, and this in turn depends on the current level of production in the capital-goods sector. Hence if there is a desire to increase the consumption, the output of the capital goods should be maximized. Capital goods are the goods which are used to produce consumer goods. For example: machinery. In simple words we can also say that capital goods are the goods which make other goods.
Consumer goods are not used to produce other goods. Consumer goods are used or consumed by the consumer and they do not aid in further production. For example: Burger.
The importance of capital goods
Capital goods, often called complex products and systems (CoPS) (Gann and Salter 2000; Hobday 2000), play an important role in today’s economy (Acha et al. 2004). Aside from allowing a business to create goods or provide services for consumers, capital goods are important in other ways. In an industry where production equipment and materials are quite expensive, they can be a high barrier to entry for new companies. If a new business cannot afford to purchase the machines it needs to create a product, for example, it may not be able to compete as effectively in the market. Such a company might turn to another business to supply its products, but this can be expensive as well. This means that, in industries where the means of production represent a large amount of a business's start up costs, the number of companies competing in the market is often relatively small.
Investment required
The acquisition of machinery and other expensive equipment often represents a significant investment for a company. When a business is struggling, it will often put off such purchases as long as possible, since it does not make sense to spend money on equipment if the company is not around to use it. Capital spending can be a sign that a manufacturer expects growth or at least a steady demand for its products, a potentially positive economic sign. In most cases, capital goods require a substantial investment on behalf of the producer, and their purchase is usually referred to as a capital expense. These goods are important to businesses because they use these items to make functional goods for customers or to provide consumers with valuable services. As a result, they are sometimes referred to as producers' goods, production goods or means of production.