Physical Capital

Published Jan 9, 2023

Definition of Physical Capital

Physical capital is defined as all the tangible assets that are used to produce goods and services. That means it includes all the tools, machines, buildings, and other equipment that are used during the production process. Or in other words, physical capital is the tangible counterpart to human capital.

Example

To illustrate this, let’s look at a small imaginary bakery called Breadco. The bakery has a few employees, but it also needs physical capital to produce its goods. That includes things like ovens, mixers, baking pans, and a myriad of other tools. In addition to that, Breadco also needs a building (i.e., the bakery itself) to store its ingredients (i.e., raw materials), produce its goods, and sell them. All of these assets are considered physical capital.

Now, let’s assume the bakery wants to increase its production. To do that, it probably needs to invest in more physical capital. That means it needs to buy more ovens, mixers, and baking pans. If it wants to grow even further, it may even have to expand its building to be able to store more raw materials and produce more goods. All of these investments are considered physical capital investments.

Why Physical Capital Matters

Physical capital is an important factor of production. That means it is an essential component in the production process for any organization that wants to produce goods and services. Without physical capital, it is impossible to produce anything.

Thus, investments in physical capital are essential for any company or organization that wants to increase its production and profitability. In addition to that, its availability of physical capital also has a positive effect on the economy as a whole because it increases the productivity of the economy and thus contributes to an increase in the collective wealth of society.