Fixed capital refers to the long-term assets that a business uses in the production of goods and services, which are not easily converted into cash or liquidated. These assets are typically necessary for the ongoing operations of a business and are used over a significant period.
Machinery and buildings exemplify fixed capital because they are physical assets that are integral to the production process. They are not purchased as short-term investments; instead, they are used to produce goods or provide services over several years. These assets have a long life span and depreciate over time, which distinguishes them clearly from other types of capital, such as cash reserves, raw materials, or labor.
Cash reserves, on the other hand, are considered liquid assets that can be readily used or exchanged for goods and services. Raw materials are inputs into the production process that are consumed in the production of finished goods, making them variable rather than fixed. Lastly, the labor force, while essential for production, represents human capital rather than fixed capital since it is not a tangible asset like machinery and buildings.