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I. Pre-reading task

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1. Capital Description and Formation.One of the factors of production which we are going to study is capital. The word "capital" refers to all tools, machines, buildings, and other goods which are not consumed directly for the satisfaction of the buyer, but which are used to produce or manufacture other goods and services which are consumed by the buyers. In modern civilization, the use of capital has become inevitable. Almost everything that we use is produced with the help of capital. If we destroy all capital like the railways, the motor car and other vehicles, factories, bridges and every other instrument of production, we shall become primitive again. Capital is not an article of consumption, but without capital very few consumption goods can be produced.

From this description of capital, you can well understand that some effort or expenditure must be first devoted to the creation of capital itself. If you think that you will catch more fish by going a bit farther into the sea, you must first make a boat to sail in. If you think that more fish will be caught with the help of a net, you must then make a net. Thus the net and the boat will become your capital. You will spend a few days in making them, or if someone else has to make it for you, he will be paid for doing that work. Thus the creation of capital is a "round about" method of production. We have to save money, again, in order to create capital. Thus the creation or formation of capital will depend upon our capacity to save. Rich people can save a lot and therefore they will invest a lot of money and become richer. The more you save, the more you can invest; and the larger the investment, the greater would be the rate of capital formation.

2. Capital Depreciation. Fixed and Circulating Capital. Every form of capital depreciates in the long run. Machines in the factory, buildings, tools and instruments - all wear out while they are used. Therefore, even if new capital is not formed some of the current income will be saved in order to keep the capital intact. It must be repaired and replaced from time to time. For this purpose the owners of capital are required to maintain a depreciation or replacement fund, out of which, they spend to keep the capital intact or replace it in course of time,

For the sake of convenience, the factory owners and other industrialists classify capital as fixed and circulating capital. By "fixed" capital they mean the factory building, machinery and other goods which, once purchased, remain with them for many years, and help production. "Circulating" capital means the raw materials, lubricating oils, fuel and other goods, which, though they also help production, are used up at short intervals and therefore will be purchased anew from time to time. From the point of view of economic theory, this classification is meaningless. Sometimes it becomes difficult to know whether something should be regarded as fixed or circulating capital. A large number of screws, nuts, etc. are used everyday in various factories. As they are required frequently, they may be called circulating capital, but in as much as they form a part of machines etc. they may be called fixed capital. If, again, an employer gives food to a labourer as part of his wages it is called circulating capital, but if he eats it himself it is not circulating capital. Thus we may explain that whether something is fixed capital or circulating capital or a consumption goods depends upon how it is used.

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