The owners of factors sell their services for money and then spend that money

The owners of factors sell their services for money

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The owners of factors sell their services for money and then spend that money to buy thegoods produced by factor services. Producers sell goods and services to consumers formoney and consumers receive income as owners of factor services. Thus income flowsfrom owners of resources (consumers) to producers and back to consumers again.Prices play an important role in this income flow. When the consumers buy commodities,it is their cost of living. When producers sell commodities, it is their business receipts.What consumers receive as owners of factor-services, it is their personal income andwhen producers pay for factor-services, it is the cost of production.
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It means that the income of an individual depends upon the amount of resources ownedby him and the evaluation of his resources in the minds of consumers. People owninglarge quantities of resources have high incomes and/or they contribute more to themaking of commodities which satisfy the consumers much.People owning small quantities of resources have low incomes and/or they contributelittle to the making of commodities which add to consumer satisfaction. Such incomedifferentials are, however, self-correcting. No individual can afford to receive a lowincome for long. So workers in the low-income category will seek employment in thatindustry which pays higher wages.The movement of workers from the lower-paying industry to the higher-paying industryresults in the reduction of supply of the former industry and increase in the supply of thelatter industry. Reduction in supply raises the price of the product, increases the profits ofthe producer and the incomes of the workers.On the contrary, increase in the supply of the other commodity lowers its price, reducesprofits as well as the incomes of the workers. This process will continue till incomedifferentials disappear altogether. In this way, prices not only determine incomedistribution but also brings its equality.4. To Utilize Resources Fully:The price mechanism also helps in the full utilization of the resources of an economy.Full utilization of resources implies their full employment. This requires increase inincome through large investments, and ultimately to the equality of saving andinvestment. In a growing economy equality between saving and investment is broughtabout by reductions in interest rates.When the economy is nearing the level of full employment by an efficient use ofresources, income grows at a rapid rate and so do savings. But investment lags behind
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which can be raised to the level of savings by interest-rate reductions. Thus the rate ofinterest acts as an equilibrating mechanism. Therefore, monetary and fiscal measures, andphysical controls are also required to influence the decisions of consumers and producersregarding saving and investment.
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