Capital goods are tangible assets a company needs for manufacturing products that will later be sold to customers. They entail tools, buildings, equipment, the machinery necessary to make final products.
Why are capital goods important?
It’s impossible to run a business without a building, equipment, tools, 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. They not only enable companies to manufacture goods but serve as a barrier for companies to start the production process. This is since equipment and tools are quite expensive yet without them the process is impossible. 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 industrial electronics industry also belong to capital goods. They can be also found in the service sector: coffee machines, fans, hair clippers, and many more.
Now that you know why such goods are important for your business, it’s time to find out the main features of capital and consumer goods.
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, when a company buys a peach to make fresh peach juice it is a capital good. 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. To obtain vehicles, buildings, machinery, and equipment for their business, companies use loans, investments, or savings because their price can be too high.
Durable goods play a great role in improving the company’s capacity to manufacture products. Simply put, they can help businesses produce products fast and in big 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 3 years);
- services (for example, haircuts).
From a marketing standpoint, these goods can be also divided into several groups: convenience goods (cheese), specialty goods (rings), shopping goods (furniture), unsought goods (life insurance).
So 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 your company produce your 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. Very often production processes involve intellectual property to legally produce products. It also needs additional investments.
Examples of Capital Goods
You can meet a lot of examples in your everyday life, especially if you own a big or small business. Every company needs capital goods to manufacture products that are later sold to customers.
Let’s take the service sector, for example. Every hairdresser should have certain equipment and tools to serve clients. All-purpose shears, curling iron, razor, blow dryer are just several goods a salon has. When a client comes, the hairdresser should be ready to meet the customer’s wants with the help of 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 keep dairy products fresh, cream separators make low-fat milk and cream, butter churns to produce butter are equipment necessary for your farm. So, for sure, you can’t imagine producing and storing perishable foods such as milk, cheese, cream without the necessary equipment.
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.
- This article covers the definition of the term, the difference between capital and consumer goods.
- In this article, you can find 11 examples of capital goods.
- This article covers the difference between capital goods and consumer goods.
Last Updated: 15.04.2021