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Four Types of Earned Income

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by Sara Hopkins on 26 November 2012

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Transcript of Four Types of Earned Income

Four Types of Earned Income Wages & Salaries Rent Interest Profit Income the financial gain (earned or unearned) accruing over a given period of time income: n. the amount of money recieved over a period of time either for goods, services, or work, or as profit from capital Wages Wages are compensation for work, also known as the price of labor. Wages are often "sticky." For example, if the demand for the labor drops, the wage will not fall. Efficiency Wages Some places may choose to pay efficiency wages to increase the productivity of their workers. This type of wage may bring a higher quality of workers than regular wages. Wages are commonly paid by hour, day, or week. Minimum Wage The minimum wage is the minimum a business can pay a worker and is considered a legal agreement set up by the government. One's paycheck may increase or decrease based on the amount of time they work. But since a wage is "sticky," it will not change. Salaries Salaries are very similar to wages. They also are recieved for doing work or performing a service, but salaries are recieved on a regular basis; weekly, bi-weekly, or monthly. People with management jobs usually have salaries, which often are more rewarding in the long run. Rent can be defined as income from hiring out land or other durable goods. The renter may pay for the use of the land or goods by the amount of usage or by the day, month, year, etc. The renter will pay the person renting materials out. The person renting out the land or goods, however, may not actually have full ownership of them. Interest is known as the cost of borrowing, usually referring to money. For example, a young student looking to pay for college may borrow money, then pay it back plus interest. Interest can also be reversed. When one entrusts the bank with their money, they collect interest from the bank, since the bank is temporarily allowed to use their money. Interest is commonly calculated in a percentage or rate, also known as interest rate. Interest Rate Interest rate is the percentage at which the interest is collected or paid. For example... You borrow $100 and the annual interest rate is 4%.
$100 * 0.04 = $4
So by the end of the year you own $104, including interest. Interest can either by charged by the day, month, year, etc. Profit is a financial gain that firms get. Profit is also known as the difference between the amount earned and the amount spent in buying, operating, or producing something. For example...
Julie had a lemonade stand to raise money for a class trip. She spent $8 on supplies and made $26. The profit would be $18. The amount spent ($8) would be subtracted from the total earnings ($26). Works Cited...
"Economic Rent." Investopedia. Web. 12 May 2011. <http://www.investopedia.com/terms/e/economicrent.asp>.
Kellaher, Karen. "Kid's Economic Glossary." Scholastic. 2 Feb. 2008. Web. 12 May 2011. <http://www2.scholastic.com/browse/article.jsp?id=3750579>.
"Economics A-Z." The Economist. Web. 12 May 2011. <http://www.economist.com/research/economics/alphabetic.cfm?letter=P#profit>. Opportunity Cost n. the loss of potential gain from other alternatives when one alternative is chosen. Opportunity cost can be described as the cost of passing up the next best choice while making a decision. If one has a personal budget, the best way to weigh out opportunity cost is to deeply consider the alternative option. A common misconception about opportunity cost is that it is an actual expense; it is not. For example...
If a city decides to build a hospital on a plot of vacant land, they are foregoing the opportunity to build a shopping center or a sports complex. The alternative options then become the oppurtunity cost. However, when on a personal finance plan or budget, you may want to get the most out of your money. For example...
You only have $4 to buy ice cream from the ice cream man. You can either buy a fudge bar for $2 or a dish of chocolate ice cream for $4. In this situation, if you chose the chocolate ice cream, the opportunity cost would be two fudge bars. Another example would be...
Your budget for redecorating your kitchen is $1,000. You can either choose to buy a new innovative stove for $1,000 or two convection ovens priced at $500 each. You choose to buy the two ovens. In this situation, the opportunity cost would be the fridge since you have foregone the opportunity to buy it. Works Cited...
"What Is Opportunity Cost?" InvestorWords.com. Web. 12 May 2011. <http://www.investorwords.com/3470/opportunity_cost.html>.
"Opportunity Cost." Kids.Net.Au. Web. 12 May 2011. <http://encyclopedia.kids.net.au/page/op/Opportunity_cost>.
Gad, Sham. "The Opportunity Cost of Investing: A Simple Concept Gone Missing." Seeking Alpha. 2 Nov. 2010. Web. 12 May 2011. <http://seekingalpha.com/article/234166-the-opportunity-cost-of-investing-a-simple-concept-gone-missing>.
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