Passive Income

Generally, you can earn passive income by investing in specific financial products, starting a business without initial investment, or earning income without working regularly. There are many different ways to generate passive income, some requiring money upfront, such as real estate investments. In contrast, others require more time and experience, such as blogging or putting together an app. However, some passive income ideas generate income and initially need a lot of work, such as developing a blog or renting a property. Still, they can make money while the owner sleeps. So, let’s get familiar with the different terms of income.

passive income

Income Effect

The income effect describes how a change in the price of commodity changes the amount consumers demand this commodity and related goods based on how it affects their actual income. The law of demand declares that the amount required for a product has an inverse relationship between the price of the good and other factors that surround it as a result of changes in the income of consumers. As defined in supply and demand, the elasticity of goods and services (also called ordinary goods) consists of the fact that an increase in income leads to a rise in the quantity consumed by the goods. In contrast, a decline in income leads to a decrease in the quantity consumed.


The income effect refers to the effect of real income on how the price change of a product or service affects the amount of disposable income, with positive or negative effects. The income effect is part of consumer choice theory, which links consumer spending preferences to the consumer demand curve, reflecting how changes in relative market prices and incomes affect consumer behavior in goods and services. It measures changes in the optimal consumption of consumers, which can be due to any combination of causes: changes in their income, changes in the quantity purchased, or a price of the goods that remains unchanged.

passive income

Example Of The Income Effect

For example, a consumer may choose to invest in a higher amount of a cheaper good rather than in a lower amount of the same good, or vice versa.

As a result, the income effect is discernible for normal goods, but for inferior goods, the positive income change leads consumers to buy more normal goods and less inferior goods. The inverse relationship between inferior goods and income effects shows as consumers choose to reduce their consumption of inferior goods as real incomes rise. This effect is directed at consumers, as income increases or decreases affect how consumers spend their money. Consumers may spend less on non-essential dining experiences due to income losses.

Real World

In practice, it can be observed that the substitution effect is greater than the income effect because consumers of a particular product are allocated a smaller amount of gross income so that the change in demand compared to the substitution effect is insignificant. As with the normal good income effect, substitution effects work in the same direction: a decrease in the relative price of a good leads to an increase in the quantity required for good, and a cheaper replacement than the original good means that consumers have a greater buying power as a whole, thereby increasing their overall consumption. When prices of inferior goods fall, income effects reduce the amount consumed, while substitution effects increase the amount consumed.

The income effect shows how changes in consumption income (purchasing power) affect consumers’ consumption habits. In contrast, the substitution effect shows that changes in the prices of goods and services encourage buyers to look for alternative products.

passive income
Income Substitution Effect

If you want to understand the concept of the income substitution effect, it is necessary to take a closer look at the kinds of goods that consumers buy and how purchasing patterns change when prices rise and fall. Consumer theory attempts to capture purchasing behavior by examining the relationship between consumer preferences, household constraints, and the combination of goods and services consumers can afford depending on income and price of goods or services. The income effect is part of consumer choice theory, which relates consumer preferences and spending to a demand curve that reflects how changes in the relative market price of income affect consumer behavior for goods or services.


For example, Starbucks is cutting prices by 20%, giving existing consumers a higher disposable income that they can no longer spend. Increasing or decreasing disposable income due to a product’s price rise or fall can stimulate or dampen demand for a product. If a household spends a quarter of its income on rice, a 40% fall in rice prices increases the disposable income that it can spend on rice.

Existing consumers, in turn, use this higher disposable income to demand more goods, known as the income effect. If disposable income rises due to lower prices, this means that consumers can buy more goods. If the increase is due to wage increases or other income flows, it can raise demand for many goods.

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In other words, an increase in income leads to a decline in demand for luxury goods when things change. Or, a moderate decline in income leads to a sharper decline in demand. If millet is an inferior commodity, if millet is a commodity whose demand decreases as the economy expands, then wheat has no customers.

Passive Income

Suppose you are considering investing your existing assets in various assets such as stocks, debt, real estate, gold, or insurance. In that case, there are ways to ensure that the inflow of funds periodically amounts to a certain amount as a form of passive income. Whether you earn income from a job, wholesale, rental, or whatever you do to make your income, buying passive investments can be very successful, and finding ways to finance it can lead you to financial freedom.

passive income

Real Estate

Real estate investors often work full-time jobs to generate an active income that can be reinvested as soon as possible to start building a passive income from things like rental properties. To be fair, generating passive income from real estate requires daily work on the details of managing rental properties, which can be delegated to a local real estate manager. If you have a job or start a business, you earn an income that you can use for passive investing.

Remember that if you want a passive income from investments, you must invest the money you earn from your active income stream. Generating active income from real estate is associated with a higher risk in return for the promise of a higher reward, similar to full-time employment. Investing in property presents its own challenges, such as finding tenants to pay the required rent and maintaining the property, but it is a strong passive income source that is worth the initial effort.


Portfolio income is money earned from dividends, capital gains, and interest that are taxed at a lower rate than income earned. How real estate investors generate active or passive returns depends on the investment strategy used.

passive income


Simply put, passive income is money earned through investments or past work that requires little or no work or active participation to generate current income. On the other hand, active income is money earned in exchange for a service provided. Income can be generated from rental properties, limited partnerships, or other companies in which you invest capital but do not have a direct stake.

The Difference To Active Income

Many people have the misconception that passive income is generated by earning little or no work, but in reality, passive income refers to a method of investing in policies or assets that generate cash flow in the future without any further effort. As an investor in a passive income stream, you do not have to spend time and effort managing any financial investment; active income is in contrast when you invest time and skills in exchange for dividends. You invest your money in products that generate income.

Active income Example

For example, if you work in a grocery store as a cashier, your money is considered an active income because you do tasks and interact with customers during the shift. If you have a job and get a paycheck, you make your money active, called earned income. Income from an enterprise can be considered active or passive as long as the owner meets the requirements for material participation based on hours worked and other factors.

passive income

Passive Income Reddit

There are many subreddits where users discuss and share ways to make money. Subreddits exist to help users find a variety of income opportunities. We have covered some of the best and most active communities. You may not know how much these websites, which can be addictive if you find the right parts to visit them, are a source of entertainment. Still, they are also great websites for you if you are looking for a way to make some money on the Internet because they are all about passive income.

If you’re looking for passive income and money to invest, Reddit is the community of subreddits for you. Here you will find a forum and resources on how to make money, tips on specific passive income streams, and case studies on how subscribers can do something to generate additional income. The Financial Planning Reddit board offers advice for people with different income levels.

Get Rich Quick With Reddit

Many great communities out there offer useful advice, tips, and ways to make real money and start working right now. There are a few popular subreddits that you should try out with plenty of regular activity and involvement that provide a wealth of knowledge about making money and have proven to be one of the most reliable sources of tips, methods, and ways to make money. Although none of these subreddits will help you get rich right away, they have plenty of ideas on how to start making money today.

I love this subreddit because the community really grapples with the fact that many posts ask questions about their specific situation and what they must do to earn an income. Many people on this subreddit have gained financial independence and offer advice and other issues to similar people in the community. Like many personal finance subreddits, this is a great place to learn investment and money tips and ask for advice.

People Helping People

Reddit users, especially middle-class Reddit users, share their Reddit stories and answer questions posed to them in the Reddit Middle-Class Finance community. Reddit is the personal finance channel where anonymous users share tips on everything from buying a house to choosing an insurance plan to manage personal and nuanced money situations.

Many people on this subreddit have gained financial independence and offer advice and other issues to similar people in the community. Leafing through other people’s questions, problems and advice makes the subject feel more normal and less scary. There are different ways for people to go, and they can make a high income in a great way.

passive income

Elasticity Of Demand

The elasticity of demand in economics is the response of demand for a product to changes in consumer income. Positive income elasticity in demand is associated with normal goods, where an increase in income leads to an increase in demand. Zero income elasticity of demand means that rising incomes do not alter the quantitative demand for goods.

Income elasticity of demand refers to the sensitivity of the amount required for a given commodity to changes in real income of the consumers who buy it while other things remain constant. The formula for calculating the elasticity of demand for income is the difference in the amount purchased over a period (year to year) divided by a change in income. A measure of elasticity of demand can be a positive or negative number, and it can be used to classify products as normal, inferior, necessity, or luxury goods.

As a result of an increase in income, the amount required for a particular product is reduced and classified as an inferior good. If a normal commodity has a positive elasticity of income demand, sales will increase as more products are in demand. If the good results in a positive calculation, the higher income will match the demand for the product.

The higher the absolute terms income elasticity of demand for a particular commodity, the more consumers react to their purchasing habits when their real income changes. Consumer income and product demand are linked in an unequal price-demand equation. For ordinary goods, the elasticity of demand is zero or one, which refers to the need for the goods, products, and services consumers buy without changing their income levels.

When buyers in a specific income bracket receive a pay rise, income elasticity can be used to predict that the pay increase will allow for more consumption on the market. High-income elasticity suggests that consumers will buy much more goods when incomes rise, but when incomes fall, they can scale back their purchases of goods to a greater extent. Low price elasticity implies the opposite: changes in consumer incomes will have little impact on demand.

Operating Income

Operating income is an accounting measure that measures the profit created after deducting operating costs such as wages, depreciation, and amortization, and the cost of the goods sold (COGs). A company’s gross income equals total revenue fewer COGs deducted from operating costs in terms of operating income.

It is calculated based on gross revenues less depreciation and amortization, which are operating expenses not attributable to the production of goods. Also known as operating profit or recurring profit, operating income is the value of a company’s revenue when subtracting operating costs. EBIT, also known as operating income (also known as EBIT), is calculated by subtracting operating expenses from production and non-production costs of sales proceeds and the amount of income that is retained from sales proceeds after deducting operating costs (direct and indirect).

passive income

Gross Income

Gross income is the amount of money your company has left after subtracting the product’s production costs (also known as “the cost of the product sold” ). Optimized operating income is the company’s profit after deducting fixed operating costs and variable expenses, including current operational expenses such as rent, salaries, depreciation and amortization, and the cost of sales of goods. The bottom line is that net income is a profit after deducting all business expenses, including interest and income tax.

Non-operating expenses

While a company’s gross income looks promising, you also need to consider other expenses associated with running the company. Non-operating expenses include, for example, interest payments, taxes, court settlements, and restructuring costs. A good operating result is an indicator of profitability. In this case, the company makes money from operations while spending more on interest and taxes.

Operating income

Operating income is a measure used by the users of the financial statements to determine the competence of the management and the efficiency of a company’s business. A company that generates more and more operating income is seen as more advantageous because it means that its management generates more revenue and controls spending and production costs.

Investors and creditors use the operating income to evaluate a company’s efficiency and profitability without considering interest expense and tax rates – two variables that are unique to a company. We achieve a pre-tax result concerning the associated costs and expenses (direct and indirect, recurring and one-off). Net income is an important metric for companies reporting earnings before operating expenses and after payments on debt.

Unearned Income

It is important to understand the difference between earned and unearned income so that you can maximize your opportunities to make money when you file your tax return. Unearned income refers to income received from other sources that have nothing to do with employment, such as passive investments that make you interest and dividends. It is money that is neither earned nor actively linked to work and is therefore often referred to as passive income.


In tax terms, both earned income and unearned income are taxed equally, but because they are unique income brackets, taxpayers should be aware of the tax differences between them. Unearned income is treated differently in tax terms from earned income to redistribute income, recognizing that it is a qualitative difference from income from productive work. You pay tax on your unearned income at your marginal personal tax rate, but your unearned income is taxed at a lower rate in certain cases (such as capital gains and qualifying dividends).

Tax Rates

There are different tax rates for income from different sources. While it is true that maintenance payments count as earned income, as do most foreign income and real estate assets, you will want to talk to an experienced tax representative if you are not sure which of these different flows of money counts as earned income. While maintenance payments can count as income for the sole purpose of IRA contributions, they can also count as unearned income against your taxes.

passive income
Understand The Difference

Understanding the difference between earned and unearned income can help you develop strategies for your financial future and allow you to explore alternative ways to make money. The IRS does not believe you should confuse earned and unearned income in your tax returns, so forget about the types of income sources if you end up with lots of tax problems. Classical free-market economists were skeptical of unearned incomes. Still, newer economists like Ronald Coase claim that capital markets facilitate the allocation of resources between companies and provide good economic benefits so that additional taxes on unearned incomes would disrupt capital markets.

Small mistakes can lead to bigger problems for the IRS, and if you are not careful, a non-expert can’t be sure that they have met 100% of the claims on their tax forms for earned and unearned income.


Unearned income includes, for example, private pensions, benefits from social security, disability, Veterans benefits, employee compensation, pensions from the railroads, and unemployment insurance benefits. The amount may vary depending on the type of unearned income but is generally tax-deductible for long-term capital gains and qualifying dividends. Children are subject to “child tax,” the rate for parents. Passive income requires effort and time on your part: unanticipated income comes from passive types of income, which require long-term investments and careful financial planning to achieve high returns.

20 Passive Income Ideas:

  • Flip websites
  • Affiliate Marketing
  • Blogging
  • Create an App
  • Company stocks
  • Airbnb
  • Dropshipping
  • Instagram Sponsored posts
  • Print on demand shop
  • Host a website
  • Rental Property
  • Sell videos
  • Selling online courses
  • Selling music
  • Sell photos
  • Sell digital products
  • Stocks
  • Use passive income apps
  • Youtube Videos
  • Write an ebook
passive income

The Bottom Line

Passive income ideas such as a house or building a blog may require some work but can earn you money while you sleep. Learn how to make income from human capital – work at a rental property, an income-producing asset, a business, social media – or any other number of other ways of making money. While some passive income ideas require an initial monetary investment, some types of passive income require investing money upfront to generate passive income.

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What to read next?

Hi, we are Lena and Chris. A finance-addicted couple from Germany. Ever since we can remember we are interested in finance. We love to research and review complex topics. As we were quite familiar with the world of finance at all, we thought we should share this information with the rest of the world. Our main reason we do this is to help people to orientate themselves in the confusing daily finance puzzle.


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