What is a Factor Payment?

For every factor of production (or input), there is an associated factor payment. Factor payments are what the firm pays for the use of the factors of production. From the firm’s perspective, factor payments are costs. From the owner of each factor’s perspective, factor payments are income. Factor payments include:

• Raw materials prices for raw materials
• Rent for land or buildings
• Wages and salaries for labor
• Interest and dividends for the use of financial capital (loans and equity investments)
• Profit for entrepreneurship. Profit is the residual, what’s left over from revenues after the firm pays all the other costs. While it may seem odd to treat profit as a “cost”, it is what entrepreneurs earn for taking the risk of starting a business. You can see this correspondence between factors of production and factor payments in the inside loop of the circular flow diagram.

We now have all the information necessary to determine a firm’s costs.