Vital for the satisfaction of people’s wants are consumer goods and capital goods or simply capital and it is very important to distinguish between these two things. Capital goods are a stock of physical assets at a given point of time. Capital plays a crucial role in the production of goods and includes such items as machinery, building and equipment. Capital is one of the three factors of production. The other two are land, which includes all natural resources, and labour. If we can increase these production factors we can reduce the basic economic problems. More capital equipment per worker means a greater output of goods.
Land and labour are called primary factors of production, for they are always present. By contrast, capital is a secondary factor of production, because it must be created.
Some economists regard entrepreneurial activity as a separate factor of production. The entrepreneur is a manager who combines land, labour and capital for production of goods.
Production is the provision of goods and services through combining the factors of production, i. e. land, labour and capital in a firm. Production is a very complex process, which includes not only the technical process by which raw materials are converted into products but also other activities, such as packaging, storing and transportation.
The ultimate aim of production is always consumption. Consumption is the purchase by an individual or family of the goods and services supplied by the firm. People earn money working in the production process. They spend their income in consumption.