productioncapital

Production capital, also known as physical capital or capital goods, refers to the tangible assets that are used in the production of goods and services. It comprises the durable, non-financial assets such as factories, machinery, equipment, vehicles, and infrastructure that contribute to productive capacity. It excludes financial assets and human capital.

These assets enable labor and management to produce more output or higher-quality goods. In economic models, production capital is typically denoted by K in a production function Y = F(K,L), where L is labor. The productivity of capital depends on its quantity, quality, and the state of technology; diminishing returns imply that each additional unit of capital adds less to output unless complemented by technology or skills.

Capital stock evolves through investment and depreciation. Firms and economies increase production capital by investing in new assets, while obsolete or worn-out capital is retired or replaced. Net capital stock equals gross capital stock minus depreciation. Investment is often measured as gross fixed capital formation; the share of GDP devoted to it is a common indicator of capital accumulation.

Production capital interacts with other forms of capital, notably human and financial capital. While financial capital funds the purchase of physical assets, human capital—skills and knowledge—affects how effectively capital is used. Intangible capital, such as software and patents, can also function as production capital in modern economies. The stock and quality of production capital influence long-run growth, productivity, and competitiveness.