Income - Economic Definitions

Economic Definitions

In economics, "factor income" is the return accruing for a person, or a nation, derived from the "factors of production": rental income, wages generated by labor, the interest created by capital, and profits from entrepreneurial ventures.

From labor services, as well as ownership of land and capital.

In consumer theory 'income' is another name for the "budget constraint," an amount to be spent on different goods x and y in quantities and at prices and . The basic equation for this is

This equation implies two things. First buying one more unit of good x implies buying less units of good y. So, is the relative price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed, then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demand. The generalization to more than two goods consists of modelling y as a composite good.

The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis.