Income and Price

Income is the flow of earnings a person or a factor of production receives, over a period of time, as a reward for rendering a productive service. Two distinctions matter here:

• Money income — income received in money terms (for example, a salary of ₹30,000 a month).
• Real income — the actual quantity of goods and services that money income can buy; it depends on the price level, so real income can fall even when money income is unchanged, if prices rise.
• Disposable income — income left after direct taxes are deducted; it is what a household actually has available to spend or save.

Price is the amount of money that must be paid to obtain a unit of a commodity or service — it is value in exchange expressed specifically in money terms. Price is determined, in a free market, by the interaction of demand and supply for the commodity, a relationship studied in detail in the next two chapters. …