Meaning and types of factor prices
The meaning and types of factor prices are explained below:-
Factor pricing is associated with the prices that an entrepreneur pays to avail the services rendered by the factors of production. For example, an entrepreneur needs to pay wages to labour, rents for availing land, and interests for capital so that he/she can earn maximum profit.
- Land- rent
- Labour- wage
- Capital- interest
- Organization- profit
Meaning of rent- Rent is the part of the national income which goes to land as a factor production. There are two types of rent and they are economic rent and contract rent. Contract rent gross rent or is the total payment made by the tenant to the landlord. Similarly, economic rent is the residual amount of the gross rent by deducting other various amounts.
Meaning of wages- Wages are remuneration paid for the services of labour. It refers to return for work measured in terms of money. There are two types of wages: one is nominal wage and the other is real wage. The real wage is the purchasing power of money wages plus other allowances. Then, the nominal wage or nominal earnings refer to the number of wages measured in terms of money.
Meaning of interest- Interest is that part of the national income which goes to capital as a factor of production. It is the cost of borrowing money typically expressed as an annual percentage of the loan. For savers, it is effectively the rate your bank or building society will pay you for borrowing your money. The money you earn on your savings is called interest.
The types of interest are gross interest and net interest. Where gross interest is the amount paid by a borrower to a lender as a return on capital borrowed and net interest is the payment made purely for the use of capital.
Meaning of profit- Profits are residual income left after all the payments have been made. There are two types of profit and they are gross profit and net profit. The difference between gross profit and net profit is when you subtract expenses. Gross profit is your business’s revenue minus the cost of goods sold. Your cost of goods sold is how much money you spend directly making your products.
Therefore the Meaning and types of factor prices are explained above.
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