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.
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 and fixed then its relative price falls. The usual hypothesis, the law of demand, is that the quantity demanded of x would increase at the lower price. The analysis can be generalized to more than two goods.
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.
Full and Haig-Simons income
"Full income" refers to the accumulation of both the monetary and the non-monetary consumption-ability of any given entity, such as a person or a household. According to what the economist Nicholas Barr describes as the "classical definition of income" (the 1938 Haig-Simons definition): "income may be defined as the... sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights..." Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full income. As such, however, it is criticized for being unreliable, i.e. failing to accurately reflect affluence (and thus the consumption opportunities) of any given agent. It omits the utility a person may derive from non-monetary income and, on a macroeconomic level, fails to accurately chart social welfare. According to Barr, "in practice money income as a proportion of total income varies widely and unsystematically. Non-observability of full-income prevent a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income.