We have seen how firms decide how much labor to hire and how these decisions determine workers wages. At the same time that firms are hiring workers, they are also deciding about other inputs to production. For example, our apple-producing firm might have to choose the size of its apple orchard and the number of ladders for its apple pickers. We can think of the firm’s factors of production as falling into three categories: labor, land, and capital.
The meaning of the terms labor and land is clear, but the definition of capital is somewhat tricky. Economists use the term capital to refer to the stock of equipment and structures used for production. That is, the economy’s capital represents the accumulation of goods produced in the past that are being used in the present to produce new goods and services. For our apple firm, the capital stock includes the ladders used to climb the trees, the trucks used to transport the apples, the buildings used to store the apples, and even the trees themselves.