If not, that is a clue that what you are thinking might not be that important and you should look for something we have already discussed. Some Tricky Definitions Economists often use words differently than they are used in casual conversation. In business, the word capital is used in two different ways. It can mean physical capital, which are goods that are used to produce other goods, for example, tools and computers. This is what we mean by capital when we are discussing the production function.
Capital can also mean funds used to finance the activities of a firm.
We use the word this way when we talk about capital markets. The reason why the word is used in both ways is that firms often use financial capital to fund their purchases of physical capital. As we will see, these are really just two sides of the same coin. When you are asked to show the effect of an increase in demand for investment, make sure you are shifting the investment curve and not the saving curve. The goods market vs. the capital market Individuals, and the economy as a whole, must choose how much of their income to consume and how much to save.