Definition of capital
The important definitions of capital are as under-
1. Adam Smith- "capital is that part of man's savings by which he expects to earn income." Thus that part of wealth is Capital which used in business for further increase of wealth.
2. Marshell- "capital consists of those kinds of wealth rather than free gifts of nature which yield income."
3. Bohn Bawerk-"capital is produced means of production."
4. J. S. Mill- "capital is the accumulated product of past labour destined for the production of further wealth."
5. Chapman- "capital is that wealth which yields an income or aids the production of income or is intended to do so."
In short, capital includes all man-made physical goods which are used for the further production of wealth.
Demand for capital (Investment schedule)
As earlier explained the demand for capital arises because of its productivity. But productivity goes on diminishing as more and more units of capital is employment in the production process. The individual firm has to compare the prevailing rate of interest with the marginal productivity of capital. Suppose a firm invests $ 0.2 million in a factory and expects a yield of 25%and another installment of a firm of 20% while the third installment might yield 15%. If he has borrowed the money at 15% interest rate he will not venture to invest more for the rate of interest the demand for capital is low and it is high at a lower rate of interest.
It follows at higher interest rate the firm used less capital and at a lower interest rate the firm demands more capital. As such demand is regarded as the inverse function of the rate of interest. In symbolic terms
I = f (r), in which ΔI/ Δr = <0
Where I = investment demand, r = rate of interest and t = functional relationship.
Characteristics of capital
Following are the characteristics of capital-
1. Capital is the result of labour- capital is the result of human labour. Thus, every type of capital such as roads, machines, buildings and factories etc. are produced by man. It is a produced factor of production.
2. A mobile factor- capital is the most mobile factor of production. Its supply can be increased or decreased.
3. A passive factor- it alone is unable to do anything. It produces with the aid of land and labour.
4. Capitals depreciate- capital is subjected to depreciation. The capital used in the form of machinery due to constant use suffers wear and tear. Therefore, this need to be replaced.
5. Supply of capital is elastic- the supply of capital is fixed. The supply of labour too cannot increase easily and quickly. The supply of capital however, is elastic and can be easily adjusted to demand.
6. Capital is not a free gift- capital is earned with hard labour and sacrifice. It is not available free like land both to the individual and society.
7. Capital grows out of saving- capital can grow only when a part of the income is saved, saving implies that resources are not utilized in order to satisfy needs. Rather they are utilized in order to satisfy present needs. Rather they are utilized for the satisfaction of future wants.
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