Q.
(a) Explain the difference between consumer goods and capital goods. (8 marks)
(b) Explain the following 'term' with suitable examples.
(i) Firm (4 marks)
(ii) Industry (4 marks)
(iii) Production input (4 marks)
(20 marks, 2015 Q4)
(17.09.2015)
A.
(a) Consumer vs Capital Goods.
There are two types of goods namely consumer goods and capital goods. Why this dichotomy, you might wonder? But then, can you compare a machine that produces shampoo sachets with the sachets themselves that are ultimately used by end consumers? Though both are goods, they are entirely different in form and function, aren’t they? This is not the only difference between capital and consumer goods as would be clear to you after reading this article.
As their name implies, consumer goods are goods meant for the end consumers. Whether you buy a cold drink, a pack of cigarettes, or a laptop, they are going to be utilized by you and hence, classify as consumer goods. Bread that you buy from market is a consumer good, but the huge oven that is used by the company manufacturing bread is classified as a capital good. Consumer goods are thus products that are bought from retail stores for personal or household need.
On the other hand, capital goods are goods that are used to make more goods, which are to be used by end consumers. All machinery, equipment, even factories that are used to produce consumer goods come under the category of capital goods. Capital goods are not natural, and are man made. The word capital is enough to convey the impression that these are goods that are expensive, and require a huge investment on the part of the company trying to make consumer goods.
Cars and other automobiles are consumer goods, but dump trucks are not classified under consumer goods. This is because they are mainly used by construction companies to haul other vehicles, and not by end consumers.
|
What is the difference between Consumer Goods and Capital Goods?
• Capital goods are goods used to make more consumer goods, whereas consumer goods are goods meant for the use of end consumers only.
• One buys consumer goods from retail stores for personal, family, or household use.
• Capital goods are bought by companies desirous of making the consumer goods.
• Machines, tools, equipments are examples of capital goods, whereas bread, butter, cold drinks, TV, laptops etc (in fact everything that is used by people) are examples of consumer goods.
|
From Wikipedia,
One should distinguish capital goods from consumption, as the aim of their purchase is different from the production of things.
Ref:
http://www.differencebetween.com/difference-between-consumer-goods-and-vs-capital-goods/
https://en.wikipedia.org/wiki/Capital_good
(b) Explain the terms:
(i) Firm
Definition provided by:
Investopedia defines a firm as a business organization, such as a corporation or a partnership, with different levels of legal protection.However, the Ludwig Von Mises Institute states that a firm in economics plays an important role in markets regardless of its legal definition. Firms represent a division of labor and production costs. Small firms may retain one general manager, whereas larger firms have many levels of management and laborers.
According to Wikipedia, a firm exists as an alternative to a market price mechanism. In comparison to the market, the theory of the firm also deals with different combinations of labor and capital to lower costs. In economics the theory of the firm considers five factors: existence, boundaries, organization, heterogeneity and evidence.
After WW1, economists shifted the focus away from overall markets to the organizational structure of firms. In 1937, economist Ronald Coase focused on the formation of firms as a result of transaction costs of production and exchange. In a market, these costs would be driven by price discovery and contract negotiations and costly renegotiations. He noted that although the external environment of a firm is uncontrollable, the entrepreneur's internal allocation of production is preferable.
According to the Mises Institute, markets also provide a less efficient division of labor than firms: In 1776 Adam Smith wrote, "the division of labor is limited by the extent of the market." Sociologist Emile Durkheim addressed this limitation in his 1892 treatise. He found that this "extent" could be measured by market density, and he concluded that markets with denser participants find it easier to trade.
Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. For example, in a labour market, it might be very difficult or costly for firms or organizations to engage in production when they have to hire and fire their workers depending on demand/supply conditions. It might also be costly for employees to shift companies every day looking for better alternatives. Similarly, it may be costly for companies to find new suppliers daily. Thus, firms engage in a long-term contract with their employees or a long-term contract with suppliers to minimize the cost or maximize the value of property rights.[3][4][5]
Ref:
DEFINITION of 'Industry'
A classification that refers to a group of companies that are related in terms of their primary business activities. In modern economies, there are dozens of different industry classifications, which are typically grouped into larger categories called sectors.
Individual companies are generally classified into industries based on their largest sources of revenue. For example, an automobile manufacturer might have a small financing division that contributes 10% to overall revenues, but the company will still be universally classified as an auto maker for attribution purposes.
Read more: Industry Definition | Investopedia http://www.investopedia.com/terms/i/industry.asp#ixzz3m2yfnBsl
Follow us: Investopedia on Facebook
Wikipedia has the explanation below:
This article is about industry in relation to economics.
Industry is the production of goods or services within an economy.[1] The major source of revenue of a group or company is the indicator of its relevant industry.[2] When a large group has multiple sources of revenue generation, it is considered to be working in different industries. Manufacturing industry became a key sector of production and labour in European and North American countries during the Industrial Revolution, upsetting previous mercantile and feudal economies. This occurred through many successive rapid advances in technology, such as the production of steel and coal.
Following the Industrial Revolution, perhaps a third of the world's economic output is derived from manufacturing industries. Many developed countries and many developing/semi-developed countries (People's Republic of China, India etc.) depend significantly on manufacturing industry. Industries, the countries they reside in, and the economies of those countries are interlinked in a complex web of interdependence.
Ref:
Wikipedia search 'Industry as in economics', available at
https://en.wikipedia.org/wiki/Industry
(iii) Production Input
Term production inputs Definition: The resources, or factors of production, used in the production of output by a firm. This term is most frequently associated with the analysis of short-run production, and is often modified by the terms fixed and variable, as in fixed input and variable input. The quantity of a variable input can be changed in the short run and the quantity of a fixed input cannot be changed.
Resources such as people, raw materials, energy, information, or finance that are put into a system (such as an economy, manufacturing plant, computer system) to obtain a desired output. Inputs are classified under costs in accounting.
Read more: http://www.businessdictionary.com/definition/inputs.html#ixzz3m325N4yz