Consumption Goods and Capital Goods

Consumption Goods and Capital Goods

All final goods (i.e., goods ready for use by their final users) produced in the economy are either in the form of consumption goods or capital goods.

(i) Consumption goods. Goods which are consumed by the ultimate consumers or which meet the immediate needs of the consumers directly are called consumption (or consumer) goods. For example, food, shirt, shoes, cigarettes, T.V. set, radio, pen, etc. are all consumer goods because when used they satisfy the immediate needs of the consumers. Similarly services rendered to consumers by hotels, retailers, barbers, cobblers, etc. are consumer services So are the services of police, courts, parks, street lighting consumed collectively by the people. Consumption goods meet the basic objective of an economy, i.e., to sustain the consumption of entire population of the economy. Human beings must consume in order to survive and work. Remember, it is consumption of basic necessities of life-food, clothing and shelter — that make us function.

Consumer goods may be durable and non-durable. Cars, T.V. sets, home computers, fridge, etc. are durable consumer goods (called consumer durables) as they have relatively long life and undergo wear and tear with gradual use. Food, vegetables, clothes, shoes, etc. are non-durable consumer goods as their life time of use is comparatively small and are not of high value. Services such as rendered by hired servants, medical care, recreation and transport services availed by consumers are like non-durable/single use consumer goods.

(ii) Capital goods. Durable goods which are bought for producing other goods and not for meeting immediate needs of the consumer are called capital goods. Examples are tools, implements, plants, machines, buildings. These are used for generating income by production units. In this regard some points are worth noting (i) While capital goods make production of other goods possible, they themselves do not get transformed (or merged) in the production process. (ii) Capital goods gradually undergo wear and tear and need repaiis or replacement over time. (iii) They are crucial backbone of production process as they aid and enable production process to continue cycles of production. Capital goods are purchased by business enterprises either for maintenance or addition to their capital stock so as to maintain or expand flow of production.

Capital Formation (Investment). 'Capital formation is the net addition to the capital stock of an economy during a given period.' In a growing economy, all that is produced in a year is not consumed usually. And that part of production which is not consumed during a year is investment. In other words, excess of production over consumption is called capital formation or investment.