Meaning in economics and use in economic theory

In economics, factor income is the flow (that is, measured per unit of time) of revenue accruing to a person or nation from labor services and from ownership of land and capital.

In consumer theory 'income' is another name for the "budget constraint," an amount Y to be spent on different goods x and y in quantities x and y at prices Px and Py. The basic equation for this is

Y = Px • x + Py • y.
This equation implies two things. First buying one more unit of good x implies buying Px/Py less units of good y. So, Px/Py 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 Y, then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demand. The generalization to more than two goods consists of modelling y as a composite good.

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.