Capital
In economics, the stock of resources that are used to produce other goods now and in the future.
In classical economics the three factors of production are capital, labour, and land.
Capital embodies the man-made resources, which include the buildings, plant, equipment, and inventories created by all three factors.
In this sense, capital goods may be contrasted with consumer goods.
The creation of capital goods means that consumption is forgone, resulting in saving.
The flow of saving becomes a flow of investment. Expenditures on education and training are often referred to as investment in human capital (see Gary S. Becker).
Financial capital is the term given to the stocks and bonds issued in order to finance the acquisition of capital goods.
Labour
In economics, the general body of wage earners.
In classical economics, labour is one of the three factors of production, along with capital and land.
Labour can also be used to describe work performed, including any valuable service rendered by a human agent in the production of wealth, other than accumulating and providing capital.
Labour is performed for the sake of its product or, in modern economic life, for the sake of a share of the aggregate product of the community's industry.
The price per unit of time, or wage rate, commanded by a particular kind of labour in the market depends on a number of variables, such as the technical efficiency of the worker, the demand for that person's particular skills, and the supply of similarly skilled workers.
Other variables include training, experience, intelligence, social status, prospects for advancement, and relative difficulty of the work. All these factors make it impossible for economists to assign a standard value to labour. Instead, economists often quantify labour hours according to the quantity and value of the goods or services produced.
Land
In economics, the resource that encompasses the natural resources used in production.
In classical economics, the three factors of production are land, labour, and capital.
Land was considered to be the “original and inexhaustible gift of nature.”
In modern economics, it is broadly defined to include all that nature provides, including minerals, forest products, and water and land resources.
While many of these are renewable resources, no one considers them “inexhaustible.” The payment to land is called rent. Like land, its definition has been broadened over time to include payment to any productive resource with a relatively fixed supply.
Rent
In common usage, payment made in return for the right to use property belonging to another.
In classical economics, rent was the income gained from cultivated or improved land after the deduction of all production costs.
In modern economic usage, rent is the difference between the total return to a factor of production (land, labour, capital) and its supply price, the minimum amount necessary to attain its services. Rent plus opportunity cost make up the total income paid to a productive resource.
Efforts made by a resource owner to obtain monopoly profit is considered rent-seeking behaviour.
Interest
Price paid for the use of credit or money.
It is usually figured as a percentage of the money borrowed and is computed annually. Interest is charged by the lender as payment for the loss of his or her money for a period of time.
The interest rate reflects the risk of lending and is higher for loans that are considered higher-risk, a relationship known as the risk/return tradeoff.
Like the prices of goods and services, interest rates are responsive to supply and demand.
Theories explaining the need for interest include the time-preference theory, according to which interest is the inducement to engage in time-consuming but more productive activities, and the liquidity-preference theory of John Maynard Keynes, according to which interest is the inducement to sacrifice a desired degree of liquidity for a nonliquid contractual obligation.
Interest rates may also be used as a tool for implementing monetary policy (see discount rate). High interest rates may dampen the economy by making it difficult for consumers, businesses, and home buyers to secure loans, while lower rates tend to stimulate the economy and encourage both investment and consumption.
Price
Amount of money that has to be paid to acquire a given good, service, or resource.
Operating as a measure of value, prices perform a significant economic function, distributing the scarce supply of goods, services, and resources to those who most want them through the adjustments of supply and demand. Prices of resources are called wages, interest, and rent.
This system, known as the price mechanism, is based on the principle that only by allowing prices to move freely will the supply of any given commodity match demand. If supply is excessive, prices will be low and production will be reduced; this will cause prices to rise until there is a balance of demand and supply.
If supply is inadequate, prices will be high, prompting an increase in production that in turn will lead to a reduction in prices until supply and demand are in equilibrium.
A totally free price mechanism does not exist in practice; even in free-market economies, monopolies or government regulation may limit the efficiency of price as a determinant of supply and demand. In centrally planned economies, the price mechanism may be supplanted by centralized government control. Attempts to operate an economy without a price mechanism usually result in surpluses of unwanted goods, shortages of desired products, black markets, and stunted economic growth.
Money
Commodity accepted by general consent as a medium of economic exchange.
It is the medium in which prices and values are expressed; it circulates from person to person and country to country, thus facilitating trade.
Throughout history various commodities have been used as money, including seashells, beads, and cattle, but since the 17th century the most common forms have been metal coins, paper notes, and bookkeeping entries.
In standard economic theory, money is held to have four functions: to serve as a medium of exchange universally accepted in return for goods and services; to act as a measure of value, making possible the operation of the price system and the calculation of cost, profit, and loss; to serve as a standard of deferred payments, the unit in which loans are made and future transactions are fixed; and to provide a means of storing wealth not immediately required for use.
Metals, especially gold and silver, have been used for money for at least 4,000 years; standardized coins have been minted for perhaps 2,600 years. In the late 18th and early 19th century, banks began to issue notes redeemable in gold or silver, which became the principal money of industrial economies.
Temporarily during World War I and permanently from the 1930s, most nations abandoned the gold standard. To most individuals today, money consists of coins, notes, and bank deposits. In terms of the economy, however, the total money supply is several times as large as the sum total of individual money holdings so defined, since most of the deposits placed in banks are loaned out, thus multiplying the money supply several times over. See also soft money.
Producer Goods
Goods manufactured and used in further manufacturing, processing, or resale.
Intermediate goods either become part of the final product or lose their distinct identity in the manufacturing stream, while capital goods are the plant, equipment, and inventories used to produce final products. The contribution of intermediate goods to a country's gross domestic product may be determined through the value-added method, which calculates the amount of value added to the final consumer good at each stage of production. This series of values is summed to estimate the total value of the final product.
Consumer Goods
Any tangible commodity purchased by households to satisfy their wants and needs.
Consumer goods may be durable or nondurable. Durable goods (e.g., autos, furniture, and appliances) have a significant life span, often defined as three years or more, and consumption is spread over this span. Nondurable goods (e.g., food, clothing, and gasoline) are purchased for immediate or almost immediate consumption and have a life span ranging from minutes to three years. See also producer goods.
Consumption
In economics, the final using up of goods and services.
The term excludes the use of intermediate products in the production of other goods (e.g., the purchase of buildings and machinery by a business).
Economists use statistical information on income and purchases to trace trends in consumption, seeking to map consumer demand for goods and services.
In classical economics, consumers are assumed to be rational and to allocate expenditures in such a way as to maximize total satisfaction from all purchases. Incomes and prices are seen as consumption's two major determinants.
Critics of the model point out that there are many exceptions to rational consumer behaviour—for example, the phenomenon of conspicuous consumption, in which the high price of a product increases its prestige and adds to demand.
Consumer Credit
Short- and intermediate-term loans used to finance the purchase of commodities or services for personal consumption.
The loans may be supplied by lenders in the form of cash loans or by sellers in the form of sales credit. Installment loans, such as automobile loans and credit-card purchases, are paid back in two or more payments; noninstallment loans, such as the service credit extended by utility companies, are paid back in a lump sum. Consumer loans usually carry a higher rate of interest than business loans. See also credit.
Market
Means by which buyers and sellers are brought into contact with each other and goods and services are exchanged.
The term originally referred to a place where products were bought and sold; today a market is any arena, however abstract or far-reaching, in which buyers and sellers make transactions.
The commodity exchanges in London and New York, for example, are international markets in which dealers communicate by telephone and computer links as well as through direct contact.
Markets trade not only in tangible commodities such as grain and livestock but also in financial instruments such as securities and currencies. Classical economists developed the theory of perfect competition, in which they imagined free markets as places where large numbers of buyers and sellers communicated easily with each other and traded in commodities that were readily transferable; prices in such markets were determined only by supply and demand.
Since the 1930s, economists have focused more often on the theory of imperfect competition, in which supply and demand are not the only factors that influence the operations of the market.
In imperfect competition the number of sellers or buyers is limited, rival products are differentiated (by design, quality, brand name, etc.), and various obstacles hinder new producers' entry into the market.
Supply Demand
Relationship between the quantity of a commodity that producers have available for sale and the quantity that consumers are willing and able to buy.
Demand depends on the price of the commodity, the prices of related commodities, and consumers' incomes and tastes.
Supply depends not only on the price obtainable for the commodity but also on the prices of similar products, the techniques of production, and the availability and costs of inputs.
The function of the market is to equalize demand and supply through the price mechanism. If buyers want to purchase more of a commodity than is available on the market, they will tend to bid the price up.
If more of a commodity is available than buyers care to purchase, suppliers will bid prices down. Thus, there is a tendency toward an equilibrium price at which the quantity demanded equals the quantity supplied.
The measure of the responsiveness of supply and demand to changes in price is their elasticity.
