Capital

Capital Definition

The term "capital" has different meanings. Economists speak of capital as a third economic factor for production as a whole. In business, the term appears as equity or debt in corporate balance sheets.

Capital in economics

In economics, capital is a production factor. In this context, the capital of an economy describes the stock of production resources that can be used to produce goods or services (capital stock). Capital also includes the following, and not only include money.

• machinery


• Tools


• Company buildings


• Infrastructures such as computer systems or created processes

The other two factors of production in economics are labor and land. The latter is fixed by natural conditions such as the availability of mineral resources. The labor, on the other hand, is variable: it brings together all potentially active persons of an economy.

The combination of labor, capital, and land comes in simplified ratios to produce the gross domestic product or the potential performance of an economy. This is known as optimal allocation of resources Because the land is fixed. Hence, labor and capital can be exchanged to a certain extent. The best example of this is industrialization. 150 years ago many farmers had to cultivate a single field. Today, thanks to machines, many fields are handled by a single person, just because capital has taken the place of labor.

Capital in the commercial sense

Capital also plays a major role in the business administration. In the balance sheet, capital is shown on the liabilities side and designated as claims on the assets of a company. For example, a company that owns shares is the capital investor for a stock corporation and is entitled to have the share in company profits or the redemption of its capital when the securities are sold.

Capital Must be distinguished from the liquidity. Liquidity describes the possibility of a company to properly fulfill its claims against third parties. An example will illustrate the difference between capital and liquidity:

• A company purchases goods from a supplier for EUR 15,000. The supplier then supplies the goods and makes an invoice, which must be settled within two weeks.


• The company has a lot of equity, a total of more than 3 million. The problem is that equity is in the form of machines and buildings. These three million euros are therefore not directly available to the company - if no machines or buildings are sold.


• The settlement of the account of the supplier can only be settled by means of capital, which has a high liquidity, i.e. availability. The company must have at least € 15,000 in the form of cash or bank deposits in order to settle the claims.


• If the liquidity is not available, the company is threatened with insolvency - even though on balance sheet, three million euros of equity are listed.

Types of Capital

There are important delimitations between capital types both in business administration theory and in the economic sense. In business economics, a distinction must be made between leverage and equity:

• The differentiation between the types of capital is justified by the legal position of the investors.


• Equity owners participate in the company's profits and leave their capital for an indefinite period within the Group. In the event of a company insolvency, equity investors are not entitled to repay the invested capital. Examples: transfer of private assets to individual companies, purchase of shares, participation in a limited liability company


• However, borrowers provide their capital only for a limited period of time. They receive their capital completely, including a consideration - usually an interest rate. If the company has to file for insolvency, the debtor's claims are fulfilled before anyone else. Examples: bank loans, corporate bonds

In the economic sense, we can differentiate between real capital and human capital. Both terms are also used in business administration. The Real capital describes all means of production such as machines or tools as well as money since this can be used directly to finance production resources.

Human capital, however, is the performance potential of the labor force, which is affected by training and education. Training and education increase the efficiency of this factor of production.

For example, the earning power of workers can be encouraged by a high degree of schooling or vocational training. Which requires high financial expenditures - that is, the use of capital. For this reason and because human capital is difficult to measure, economists consider both the concepts separately.

Pareto Principle

The 80:20 rule describes a trend or trend that is still surprising in many industries, according to which about 20 percent of customer connections contribute to 80% of company success.The rule of Vilfredo Federico Pareto was already formed more than 150 years ago, although the economies of that time were still dominated by smaller companies and multinational companies have not yet been active worldwide.

The 80:20 rule, also known as the Pareto rule , is not the exact percentage, but a basic statement that also characterizes the organizational structure of most companies in the 21st century. A large number of business relationships contribute only a fraction of the company's success , A small percentage of top customers or top business relationships is crucial.

Impact of the 80:20 rule: graded service levels depending on coverage or turnover

In most companies the implementation of the 80:20 rule has a multi-stage sales structure: this is divided into customer consulting or sales for standard customers and another organizational unit for the most important customers, which usually also reports directly to the Management Board. The names in the different industries are different, but the principle is the same: in normal sectors, normal customer relationships are maintained by a service team, a branch team or a service center. After reaching a certain level of sales, personal contact persons or teams will be commissioned to deal more intensively with the handling of this crucial business of the future of the company.

In the banking sector, for example, a "standardized mass customer transaction" or "retail banking" is used for the accounts with low coverage. This includes asset management or services for "selected clients" right up to "private banking" or wealth management. When it comes to distributing goods or machinery, it is often the case that there is a regional organization for the average customer and a further organizational unit for the special customers.

In many industries, the entire customer experience is aligned with the 80:20 rule

In industries where customers are not first-class customers of the 80/20 rule, companies have established a system for approximately fifteen to twenty years to make the customer experience of the top customers more comfortable. Customers are handed out differently colored customer cards so that the preferential treatment can be delivered not only on the actual purchase of the day, but also on the value of the total customer connection. The fact that this strategy is successful is demonstrated by various shitstorms, which break out whenever a group of customer groups are shortened or when the access requirements for a high customer color are changed. The most active in this area are airlines, hotel chains and credit card issuers.

From the 80: 20 rule to portfolio analysis

As soon as the link between company success and the respective "Top 20" is clarified, this basic consideration can be extended to many different areas of the company. If you are generating sales statistics, you will quickly notice that there are some top sellers or blockbuster who generate a large part of the sales and are therefore of paramount importance for the company's survival and value development. Therefore, in almost every area, companies are guided by a value-added approach and the right entrepreneurial activities are focused on the activities that best serve the company's objectives. Over time, the view has been further developed into a portfolio view, and a distinction is made between A / B / C customers or products.

The 80:20 rule has the following importance for companies:

• It describes a link between company success and the sources


• It provides indirect information on how the company organization should be set up


• It is a long-term relationship and is relatively independent of the sector and the company

Transformation Curve

The transformation curve (also: production curve) is, in short, a graphical representation of all the product mix combinations which have previously been classified as efficient. The basis for this is in particular the given use of resources.

Another word for transformation curve, which is even more popular, as the production possibility curve. As the term suggests, the transformation curve shows the limits of production possibilities. It is thus shown what can be produced in a particular area of ​​the economy.

Of course it is not possible to refer the values ​​to an entire national economy of a whole country. Rather, the transformation curve should be used to create a theoretical concept for some smaller areas of the respective national economy.

Initial Situation

In order for a computationally solvable computation to be possible for a transformation curve, it first requires some assumptions to simplify the facts somewhat. For example, it should be assumed that there is, for example, only one production factor, which is still fully engaged at all times. In addition, it should, of course, be assumed that the necessary technical know-how as well as the respective machines are available and always work.

Graphic Representation

The primary goal of all calculations of the transformation curve is, of course, to obtain a graphical representation. But what does such a graphical representation of the production curve look like? It is shown in the above diagram.

On the X and Y axes, two different goods are first compared: 'Number of Tractors' on the Y axis and 'Number of cars' on the X axis. The actual transformation curve is then found in the center of the graph.

Production Function

Roughly speaking, the term production function means the relationship between the production factors and the goods that are produced with it. The prerequisite for this is of course a correspondingly functioning production technology.

The goal of such a production function is primarily to find out how high the maximum production quantity can be, which can be produced with consideration of the input. For some time, the calculations of the production functions also include aspects that involve the environment.

The term "production function" was coined by Vilfredo Pareto. Generally speaking, the production function is concerned with the quantity ratio between the individual factors, both in the production as well as in the output.

Types of Production Functions:

Substitutional production function

In the case of a substitutional production function , it is assumed that a certain production factor can be replaced by another, that is, substituted. Of course, this is not always possible and only in very tight boundaries.

The quantity of output thus remains the same in the case of substitutional production functions, while the quantity of the input changes. Finally, other production factors are used in the input, since a substitution or substitution occurs.

A simple example: both labor and capital are usually indispensable for production as a production function. But if a producer chooses to spend less on modern, automated machines, he must invest more in the production factor at the same time. There is thus a subsidiarity, since one factor is replaced by the other.

In this context one should look more closely at the concepts of peripheral and total subsidiarity. While peripheral subsidiarity is characterized by the fact that replacement of production factors is possible only within very narrow limits, the situation is different in the case of total subsidiarity. Here, one factor is completely replaced by another. A factor therefore falls completely away.

Limitational production function

The situation is different with the so-called limitational production function . Here a substitution (subsidiarity) of the individual production factors is not possible without further ado. There is therefore a certain employment relationship between the individual factors.

In this case, it is not possible to simply replace one production factor with another. The yield increases with the limitational production function only if both production factors are used more and more.

For the entrepreneur, the art of the limitative production function primarily consists in finding the optimal employment relationship between the individual production factors. The goal is, of course, not to waste a factor by unnecessarily excessive use.

Market Equilibrium

If the supply meets exactly one another with the demand of a product, there is a market balance. Such a market equilibrium is often shown in a graphical representation. Here one can see the level of market equilibrium at the interface between supply and demand curves. The market equilibrium is, of course, generally the optimum state of a market, since neither a supply transition nor a surplus demand prevails. From this equilibrium, on the one hand, the equilibrium quantities and, on the other hand, the equilibrium rate can be deduced.

Path to market equilibrium

Of course, not every market is constantly in the market balance. After all, on the real market, there are constant fluctuations in supply as well as in demand. For this reason, it may take some time for the market equilibrium of a product to settle. This leveling is achieved by ongoing adjustments by both consumers and suppliers. Companies have the opportunity, for example, to achieve market equilibrium through price adjustments. Consumers, on the other hand, can, for example, buy on stock and thus also contribute to the equilibrium of the market.

Determination of market equilibrium

In order to be able to determine market equilibrium, on the one hand, the so-called equilibrium price and, on the other hand, the so-called equilibrium quantity. But what is the equilibrium or the equilibrium quantity?

Equilibrium quantity

As the name implies, the market is in equilibrium in terms of equilibrium. The offered and requested quantity of a particular good is therefore identical. There is neither a supply nor a demand surplus.

Equilibrium price

Just as with the equilibrium quantity, the equilibrium point is a state of equilibrium in the market. When looking at the equilibrium price, one should keep in mind that a supplier always strives to get the highest possible price for a product and sell many products. The customer, on the other hand, would like to buy more, the cheaper the price is ultimately. Even at the equilibrium price it is assumed that there is neither a supply nor a demand surplus. The state of the equilibrium price must, of course, be achieved by means of protracted settling on the market.

Market

What is a market and how is it created?

Definition: The market is the place where supply and demand meet. It arises from the needs (deficiencies) of the consumers who want to be satisfied.

If the needs are covered by purchasing power, they become a necessity. If the needs of the consumers are large enough, it becomes demand and hits the market supply. Goods and services provided by companies is called supply.

Which types of market are differentiated?

One differentiates the market types according to different ranges:

• Subdivision of the markets to the subject (to the matter)


• Consumer goods or market; Goods for the final consumer, such as food


• Capital goods market; Goods for the production of other goods such as machines


• Money market; Provision of short-term capital (<1 year) by banks, private individuals


• Capital markets ; Provision of long-term capital (> 1 year) by banks, private individuals


• Labor market; Supply and demand of human labor


• Real estate market; Sale and purchase of plots and buildings


• Foreign exchange market ; Purchase and sale of currencies


• Services market; Eg trade with insurance companies


• Special market; Trade of special goods, eg delicatessen

Division of markets by territory

• Global market (worldwide, across Europe, neighboring countries)


• Internal market (in US eg single market)

Structure of the markets according to their function

• Procurement market; Domestic and import market


• Market; Domestic and export market

Breakdown by time (duration)

• Weekly market (eg market day once a week)


• Year market (eg Christmas market)

Organization of the markets according to their organizational forms

• highly organized, such as exchanges or fairs


• Not organized or very little, such as shops where supply and demand coincide randomly (the most common form)

Which market types are differentiated?

One differentiates:

• free market; No access restrictions for market participants


• limited markets; Restricted access for market participants by economic or legal requirements, such as minimum capital requirements, authorizations or concessions

Which market forms are differentiated?

Market Shapes:
The difference in the market forms is the number of suppliers of a similar product compared to many buyers.

• Monopoly


• Oligopoly


• Polypol

Who are the market participants?

Market participants are individuals, governments, banks, businesses and residents who offer their goods and / or services.

Goods Definition

Goods are a means of satisfying needs . Whoever acquires a good, does so with the expectation that it gives him a benefit. For this reason, he is also willing to pay a certain price for it.

Goods have a

• Basic use,


• Additional use,


• Overall use,


• Average,


• And border use.

Basic and additional use

Goods have a basic use. Water quenches thirst, bread quenches hunger . Frequently, however, goods also have an additional benefit . Beer, for example, not only cleans the thirst, but also creates a moody mood and ultimately makes you drunk.

Total and average use

The total quantity of a good, such as six bottles of beer, provides a total benefit. The enjoyment of six bottles of beer can be forgotten by everyday stress ( the consumption of an excessive quantity of beer is, of course, discouraged ). By dividing the total use by the number of partial quantities, the average benefit is obtained. This means that the consumption of a bottle of beer reduces the daily stress by one sixth.

Border use

The increase in the quantity of the goods by one unit, ie the useful growth, is referred to as the limit value. The first bottle of beer is the best . It leads to greater satisfaction. The second beer already contributes less to alleviate the worries. So it has a smaller limit. When drinking the rest of the beers, the limit is decreasing . Another beer would presumably lead to drunkenness and thus has no longer any limit. Rather, it would lessen the overall benefit of all previously enjoyed beers (reference: 1. Gossen's First Law - according to Hermann Heinrich Gossen - the relationship between the consumption of a good and the satisfaction.).

There are different types of goods:

• Free and economic goods


• Material and intangible goods


• Consumer goods and investment goods


• Consumables and consumer goods


• Public and private goods


• Meritorious and demeritory goods


• Complementary and substitutive goods