ICS FA ICom Notes Class XI Principles of Economics Formation of Capital

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Formation of Capital

Capital is the produce means of production and it comes in to existence when wealth is used for further production. The formation of capital depends upon:

1. Ability to Save and Invest

Ability of saving and investing of the people largely depends upon the excess of income over expenditures. Taking the people as a society it can be said that the ability to save and invest of a nation depends or is determined by excess production over consumption there will be no saving .In terns this saving becomes a part of capital formation.

2. Willingness to Save and Invest

Willingness to save of the people depends upon the consideration. This consideration may either be subjective or objective. Subjective consideration or personal factors include the factors, which are associated with the individual who save. This consideration include the following:

(i) Foresightedness

People save a certain portion of their money by way of foresightedness. They save for rainy days or to meet social obligations like education and marriages of their children in later part of their lives.

(ii) Social and Political Consideration

It refers to that part that people save in order to have a prestige in the eyes of others. A wealthy man is given much respect in the society and therefore people save to become wealthy and gain social prestige.

(iii) Economic Consideration

Economic consideration refers to the idea of receiving income from saving. People save to make further earnings. Entrepreneurs making saving in order to use it for further expansion of their wealth or to covet the gap between receipts and expenditure on the course of their business.

3. Mobilization of Savings

The next step is the formation of capital is that savings must be mobilized and transferred to the people who require them for investment in the capital market funds are supplied by individuals, investors, banks, investment trusts, insurance, companies, finance corporations, government etc. if the rate of capital market is to be stopped up the development of capital market is very necessary.

4. Investment of Saving in Real Capital

For saving to result in capital formation they must be invested. There must be number of honest and dynamic entrepreneurs in the country who should make investment of the savings. They will make investment if there is sufficient inducement to invest, which depends on the marginal efficiency of capital i.e. the prospective rate of profit on one land and the rate of interest on the other.