Transfer earnings refer to the minimum price that is required to get the services of a factor of production and retain that factor.

Each factor of production has a number of alternative uses. When a factor is transferred from one use to the other alternative use, the income generated from the first use has to be foregone.

The income that is foregone is the transfer price of the factor. Thus, transfer earnings are the minimum earnings that need to be generated from a factor so that it can be sustained for use in the present.

Some of the management experts have defined transfer earnings as follows:


According to Benhams, “The amount of money which any particular unit could earn in its bets paid alternative use is sometimes called its transfer earnings.”

According to Mrs. Robinson, “The price which is necessary to retain a given unit of a factor in a certain industry may be called its transfer earnings or transfer price, since a reduction of the payment made for it below this price would cause it to be transferred elsewhere: and any particular unit of a factor may be said to be at the margin of transference, or to be a marginal unit, if the earnings, which it receives in the industry, where it is employed, are only just sufficient to prevent it from transferring itself to some other use.”

Let us understand the concept of transfer earnings with the help of an example. A labor is earning Rs. 500 in his/her present job. If he/she wants to change the job, then the minimum amount at which he/she can accept the new job is Rs. 450. Therefore, the second best alternative for labor is the organization that can provide him/her Rs. 450.

This implies that the present organization of the labor should at least pay Rs. 450 to him/her so that the labor can be retained. In case, the labor does not get the minimum amount for the service rendered by him/her, then the factor can be transferred to the other best alternative. Another example can be cited for land, which constitutes an important factor of production.


A land on which sugarcane is cultivated produces more profit than the land on which cotton is cultivated. In case, the profit generated by the cultivation of cotton is lesser than that of sugarcane, then the farmer would grow sugarcane instead of cotton. Therefore, the change in prices of crops can make the farmers move from one crop to the other on the basis of profit they yield. This is the transfer of land from one crop to another.

Transfer earnings play an important role in theory of value. It helps in determining the supply of a factor to a particular industry. An industry needs to allocate a certain amount of price to a factor, which is equal to its transfer earnings. For example if an industry has decided the wage level of labor, then the number of individuals who are ready to work at the price level decided by the industry would signify the supply of factor of production. In this way, transfer earnings help in determining the supply of factor. In addition, it also helps in the determination of price of a factor.