Capital goods are tangible assets a company needs for manufacturing products that will later be sold to customers. They entail tools, buildings, equipment, or the machinery necessary to make final products.
Why are capital goods important?
It’s impossible to run a business without a building, equipment, tools, or machinery which aren’t at hand. These physical assets are the main factors of production that ensure the manufacturing process of finished goods.
In today’s economy, capital goods play an important role. Not only do they enable companies to manufacture goods but serve as a barrier for companies to start their production process. Sure, equipment and tools are quite expensive, but the process is impossible without them. That’s why some businesses might seek help from another company to supply products.
These goods are not necessarily presented in the form of machinery and equipment to manufacture products. Various devices from the electronics industry also belong to capital goods as well as the ones found in the service sector: coffee machines, fans, hair clippers, and many more.
Now that you know why such goods are essential for your business, it’s time to find out the main features of capital and consumer goods and the difference between them.
Capital Goods vs. Consumer Goods
Goods can be divided into two groups based on the way they are used. A capital good is used to manufacture final products, whereas a consumer good is a final good sold to customers and further used by them for their purposes.
The same product can be both capital and consumer based on how it’s used. Let’s take a peach, for example. A peach you buy at a supermarket to eat is a consumer good. However, it becomes a capital good when a company buys a peach to make fresh peach juice. As you can see, the main difference between them is the way of utilization.
Capital goods are usually used by companies that aim at manufacturing products and services. These are buildings, equipment, tools, and vehicles. They have no connection with financial capital that defines the funds invested in a company to bring benefit to its owner.
It’s worth noting that companies don’t sell capital goods, but they sell consumer goods. That’s why this type of goods can’t bring direct profit like consumer goods. Companies use loans, investments, or savings to obtain vehicles, buildings, machinery, and equipment for their business because their price can be too high.
Durable goods play a significant role in improving your company’s capacity to manufacture products. Simply put, they can help businesses produce products fast and in large quantities.
Consumer goods are final goods people buy for consumption and aren’t further used to produce other goods. You see such products in your everyday life: clothing, food, electronics, and more. There are three types of final goods:
- durable (have a lifespan of 3+ years);
- nondurable (have a lifespan of fewer than three years);
- services (for example, haircuts).
From a marketing standpoint, these goods can also be divided into several groups: convenience goods (e.g., cheese), specialty goods (e.g., rings), shopping goods (e.g., furniture), and unsought goods (e.g., life insurance).
Now that you know the difference, it’s time to move to the types of capital goods.
Types of Capital Goods
When we discuss capital goods, we don’t necessarily mean fixed assets that include manufacturing equipment. All goods that help produce a product or service are capital goods. You can even find them in the service sector, for example, the equipment hairstylists use, paints for painters, or musical instruments for musicians.
Besides tangible assets, capital goods can also be in the form of intellectual property. Production processes often involve intellectual property and additional investments to manufacture products legally.
Examples of Capital Goods
Every company needs capital goods to manufacture products that are later sold to customers. You can notice a lot of examples of this in your everyday life, especially if you own a big or small business.
Let’s take the service sector, for example. Every hairdresser should have specific equipment and tools to serve clients. All-purpose shears, curling irons, razors, blow dryers are just several goods a salon has. When a client comes, a hairdresser should be ready to meet their wants with the help of proper equipment.
Let’s imagine that you are giving a thought to opening a dairy farm. To get milk, cheese, cream, and butter through milk processing, you need to buy specific equipment and tools. Milk tanks that keep dairy products fresh, cream separators that make low-fat milk and cream, and butter churns to produce butter is the equipment necessary for your farm.
To conclude, a business can’t exist without capital goods since they’re vital for the manufacturing process of final goods. Machinery, property, tools, equipment are all capital goods used in the manufacturing process of products or services.
Resources:
- This article covers the definition of the term, the difference between capital and consumer goods.
- This article covers the difference between capital goods and consumer goods.
Last Updated: 22.03.2023
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