Income, in the economy area, refers to the price of inputs that have a fixed amount.
Income in economy is the price of fixed supply inputs such as land, capital or even a unique talent such as the footballer Messi or the singer Beyoncé. It is a stream of income that is received from the use or rental of said inputs.
How income is measured
It is measured in monetary units (for example, euros or dollars) per unit of time per unit of the factor. Thus, for example, land rent in Cancun can be measured as $ 10,000 per hectare per year.
Market and income equilibrium
In the following graph we see an example of the income equilibrium of an input, in this example, land. Since it has a fixed quantity, its supply is perfectly inelastic (it is observed as a vertical OF FIXED). See elasticity. The price of land is determined by demand (DDA). In this way, the intersection between the demand curve and the supply of fixed land results in the equilibrium rent E.
An interesting fact to analyze is the effect of a tax on the income of an input such as land. As it is a fixed offer, it is necessary that this tax does not introduce any distortion in the economy, as long as we are in a perfect competition scenario.
In effect, when the tax is introduced, supply and demand remain constant. The claimants continue to demand all the available land while the land owners cannot modify their offer and are forced to assume the full payment of the tax.
In the following graph we see this situation, the demand curve (DDA WITH IMP) reflects the effect of the lower income received by the owners of the land after paying taxes. The new equilibrium is E2. If the supply were elastic, the payment of the tax would be shared between the buyers and sellers, but this does not happen when the supply is fixed.
Capital goods income
The owners of capital goods such as machinery, buildings, etc. they can use them for their own production or rent them to others. When they are rented, the payment for the temporary use of these assets is called capital income.
Return on capital
A relevant measure in deciding which capital goods to invest in is the rate of return on capital. This rate indicates the net return per year of each unit of money (dollars or euro, for example) invested.
Other meanings of income
The concept has other meanings in other areas as well. Here are two of them:
- Tax: refers to all income or benefits obtained from an activity or, regardless of its origin. These rents modify the patrimony upwards.
- Macroeconomic: usually refers to national income.