Capital vs. Consumer Goods: An Overview
Capital goods and consumer goods are terms used to describe goods based on their use. A capital good is any good used for production. Consumer goods are those used by consumers and have no future productive use.
The same physical good could be either a consumer or capital good, depending on how the good is used. For example, a riding lawn mower purchased by a land owner to mow the yard is a consumer good; the same lawn mower purchased by a lawn care business is a capital good.
Key Takeaways
- Capital goods are man-made products used by a business to produce consumer or other capital goods.
- Consumer goods are products used by consumers.
- Capital goods include items like buildings, machinery, and tools.
- Examples of consumer goods include food, appliances, clothing, and automobiles.
- The same physical good could be either a consumer or capital good, depending on if it’s used by a business in the production process or purchased for consumption and not intended for production or profit.
What Are Fast-Moving Consumer Goods (FMCG)?
Capital Goods
Capital goods are any tangible asset used by a business to produce goods or services for consumer goods or for use by other businesses. They are generally durable goods that can be used more than once. The most common capital goods are property, plants, and equipment (PPE). Natural resources not modified by human hands are not considered capital goods.
Businesses accumulate capital goods and put them to use to produce the goods and services they sell. In other words, capital goods make it possible for companies to produce goods, often at a higher efficiency level.
Consumer Goods
A consumer good is any good purchased for consumption and not used later to produce another consumer good. Consumer goods are sometimes called final goods because they end up in the hands of the consumer or the end-user.
Examples of consumer goods include food, clothing, vehicles, electronics, and appliances. Consumer goods fall into three categories: durable goods, nondurable goods, and services. Durable goods have a lifespan of more than three years and include motor vehicles, appliances, and furniture. Nondurable goods have a lifespan of fewer than three years. This includes items such as food, clothing, gasoline, and services like haircuts, oil changes, and car repairs.
Consumer goods can be classified in four ways:
- Convenience goods: Goods consumed and purchased regularly, such as milk.
- Shopping goods: Goods that require more thought and planning and include appliances and furniture.
- Specialty goods: Goods that are more expensive and cater to a niche market. Items such as jewelry are specialty goods.
- Unsought goods: Goods purchased by some consumers to serve a specific need. Life insurance is an unsought good.
The sale of most consumer goods is overseen by the Consumer Product Safety Act passed by Congress in 1972. The act created the U.S. Consumer Product Safety Commission, which regulates product safety and has the authority to seek recalls from manufacturers and ban products under certain circumstances.
Key Differences
- The purpose of capital goods is to help produce other products. They are meant to be used for production, while consumer goods are bought for personal and final consumption.
- Businesses, companies, and manufacturers buy capital goods. Consumer goods are bought by consumers.
- Consumer goods are characterized by having a direct demand, as they directly satisfy the needs of consumers. On the other hand, capital goods have a derived demand since they indirectly satisfy consumer needs.
Capital Goods vs. Consumer Goods Example
A capital good is a man-made product that is used in production. A pre-built computer purchased by a graphics design business is a capital good. Additionally, the components of that computer are capital goods because they were used to build a computer designed for commercial use.
The same manufacturer could sell the same computer for home use. This computer would be a consumer good, even if it had the same components as the one sold to the graphics design business. Capital and consumer goods can be the same or different products; the distinction lies in how the goods are used and who uses them.
What Is the Difference Between a Capital Good and Capital Stock?
Capital goods are the assets used by companies and manufacturers in the process of production. Capital stock, on the other hand, refers to the total physical capital available in a company (in the form of plant, property, equipment, machinery, etc.). Capital stock can also refer to the amount of common and preferred shares a company is authorized to issue.
Do Durable Goods Include Both Capital Goods and Consumer Goods?
Yes, durable goods can be capital goods (man-made, durable items used by businesses to produce goods and services, like tools, buildings, vehicles, machinery, and equipment), as well as consumer goods. Consumer goods that have a long life span (i.e., over three years) and are used over time are considered durable goods. Examples include vehicles, appliances, and technology.
Is a House a Capital Good?
A house can be a capital good if it’s used by a business to produce goods and services. Just like tools, vehicles, machinery, and equipment, buildings can also be capital goods. A clear example would be a hotel. In most scenarios, however, a house would be a consumer good because it is purchased primarily to reside in.