Capital goods, also known as capital, are the costly and durable non-labor inputs essential for production, such as machinery, equipment, and buildings. This category excludes inputs that are used in production but have no direct cost to the user, like air, water, or general knowledge.

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A firm's production process involves utilizing capital goods it owns or rents, like buildings and equipment, and employing workers. Through this process, the firm creates goods and services intended for sale in the market.

Firm's Production Process

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

Firms use various inputs for production. These inputs include physical capital, such as factories and specialized machinery for processes like casting and welding. They also encompass material inputs like raw materials and components. Finally, firms require human capital, which can be distinguished into direct production labor (workers who operate equipment) and indirect or overhead labor (staff for management, marketing, and sales).

Examples of Firm Inputs

A primary distinction between the production activities of households and firms relates to their engagement with the market. While firms typically produce goods and services to be sold for profit, households generate outputs that they may not offer for sale in the market.

Distinction Between Household and Firm Production

A key decision for any firm is choosing its production technology, which dictates how inputs are transformed into output. The Industrial Revolution, for example, introduced significant new options for firms, such as technologies that boosted labor productivity using coal-powered machines. This development highlighted the need for firms to evaluate the costs associated with different available technologies to make an informed choice.

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