the firm needs to produce a given quantity of output, which is the first thing we need to determine total cost.

Let’s move to the second factor we need to determine.

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
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