Economics · Ch 6 — Distribution Analysis
Comparing the Four Factor Incomes
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Comparing the Four Factor Incomes
Having studied rent, wages, interest, and profit individually, it is worth stepping back and comparing all four factor incomes side by side, since exam answers on distribution very often ask students to "distinguish" or "compare" two or more of them.
| Factor Income | Paid to | Nature of Payment | Can it be negative? | What chiefly determines it |
|---|---|---|---|---|
| Rent | Land | Contractual, but Ricardo treats it as a residual SURPLUS over the marginal (no-rent) land | No | Differences in fertility/situation between grades of land |
| Wages | Labour | Contractual, fixed in advance | No | Demand and supply of labour; Marginal Revenue Product of labour |
| Interest | Capital | Contractual, fixed in advance | No | Demand and supply of capital / loanable funds; liquidity preference and money supply |
| Profit | Entrepreneurship | RESIDUAL — whatever remains after rent, wages and interest are paid | Yes — can be a loss | Risk/uncertainty-bearing and successful innovation |