What is factor income? Definition and examples
Factor income is income we receive from at least one of the four factors of production. The factors of production are the building-blocks of the economy. Factors of production are the inputs we use to produce things so that we can make a profit.
Economists divide the factors of production into four different categories: Land, Labor, Capital, and Enterprise.
Each factor of production, when we put it into use, provides us with an income, i.e., a factor income.
BusinessDictionary.com has the following definition of the term:
“Returns received on factors of production: rent is return on land, wages on labor, interest on capital, and profit on entrepreneurship.”
Do not confuse the term with ‘transfer income.’ Transfer income is income received without providing any service or good in return. Gifts, subsidies, and donations, for example, belong to the transfer income category.
Factor income from four factors
Land is a factor of production. It also includes anything that comes from the land such as a natural resource or agricultural production.
Forests, coal, copper, oil, and natural gas, for example, belong to the common land or natural resources category.
Economists say that land’s factor income is rent.
Labor, in this context, refers to workers’ efforts in the creation of goods and services.
When you order a meal in a restaurant, for example, labor includes everything the waiter, chef, and bartender do.
Any human who has received payment for work has contributed labor resources to the production of things.
Labors factor income is wages, i.e., the money people receive for the work they have done.
For most people, their largest source of income comes in the form of wages.
Capita includes building, tools, machines, and vehicles. It includes every element that we use to produce things. Delivery vehicles, conveyor belts, hammers, and forklift trucks, for example, are items of capital
What kind of work we do determines the type of capital we use. A teacher, for example, uses textbooks, computers, a whiteboard, and desks to deliver education services.
Doctors, on the other hand, use stethoscopes, thermometers, and an examination room to deliver medical services.
Capital’s factor income is interest.
Enterprise or entrepreneurship is what we require to combine the other three factors of production. The entrepreneur uses capital, labor, and land to produce goods or deliver services.
A good entrepreneur will use the factors of production to make a profit. Hence, the factor income of enterprise is profit.