Factors of production (1 Viewer)

[king.rafa]

hey there

can ne of you explain how interest is a return on capital? iv looked everywhere but i cant find a clear-cut explanation.

thanks

 

[karnage]

Capital = funds $$$.

You can put the funds in the bank and earn interest on it as a return.

Simplified explanation.

 

[king.rafa]

no i mean capital as in the produced means of production.

 

[veloc1ty]

Capital is funds. These funds can buy machinery etc which are used in production. So it's the produced means of production.

 

[gnrlies]

no i mean capital as in the produced means of production.

Capital goods require money to purchase them. Obviously whoever provides the capital must earn a return for providing that capital otherwise why would they provide it?

You (and I am sure many others) get confused between capital goods and capital (as in money) by thinking of them as two separate things when they are of course one in the same from the eyes of an economist. To an economist it doesn't matter what form capital takes, whether it is a tractor, or a building it is all the same.

But please realise that the whole land labour capital enterprise thing is a very simplistic way of looking at the world. The economy is far more sophisticated than this. The lines are blurred, for example you can own shares and earn profits but not really be an entrepreneur as the collective property rights do not really give you any control over the business. Share markets are really just another capital market with a slightly different risk orientation.

The four factors of production is really just an abstract concept that explains to some extent how revenues are allocated within a firm.