Question

The expenses incurred on the purchase of seeds, fertilizers, and pesticides are examples of:

• A. Sunk capital
• B. Circulating capital
• C. Floating capital
• D. Operating cost

Hint:

Exam Tip:
Fixed Capital: Used repeatedly over many years (land, machinery).
Circulating Capital: Consumed in one production cycle (raw materials, seeds, fertilizer).
In agriculture, farm machinery is fixed capital, while seeds and fertilizers are circulating capital.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question tests the classification of capital in economics and business. Capital is typically classified based on its durability and how it is used in the production process.

Step 2: Defining Types of Capital:
Let's define each term:

• Sunk Capital (Fixed Capital): This refers to long-term assets that are used repeatedly in the production process. They are durable and not consumed in a single production run. Examples: Machinery, buildings, equipment. They depreciate over time.
• Circulating Capital (Working Capital): This refers to capital that is consumed in a single production cycle and is transformed into the final product. It includes raw materials, seeds, fertilizers, pesticides, and fuel. The value is fully recovered in the sale of the product.
• Floating Capital: This is often used interchangeably with circulating capital or working capital. It refers to assets that are liquid or used for short-term operations.
• Operating Cost: This is the total cost of running a business, which includes both fixed and variable costs.

Step 3: Analyzing the Expenses:
Seeds, fertilizers, and pesticides are inputs in the production process.
They are used up in the current production cycle to produce the final crop.
Their value is fully transferred to the final product and is recovered when the crop is sold.
This is the definition of circulating capital.

Step 4: Final Answer:
Expenses on seeds, fertilizers, and pesticides are examples of circulating capital. Therefore, option (B) is correct.