Lec 18-19 How Markets Determine Incomes.ppt

8/20/2019 Lec 18-19 How Markets Determine Incomes.ppt

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HOW MARKETSHOW MARKETS

DETERMINE INCOMESDETERMINE INCOMES

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INCOMEINCOME

Income refers to the flow of wages,Income refers to the flow of wages,interest payments, dividends, and otherinterest payments, dividends, and otherthings of value accruing during a period ofthings of value accruing during a period of

time.time. The aggregate total of all incomes isThe aggregate total of all incomes is

national income.national income.

The biggest share of national income goesThe biggest share of national income goesto labor, either as wages or salaries or asto labor, either as wages or salaries or asfringe benefits.fringe benefits.

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FACTOR INCOMES VS.FACTOR INCOMES VS.

PERSONAL INCOMESPERSONAL INCOMES Income which comes from factors ofIncome which comes from factors of

production.production.

Land, Labor, machinery etc.Land, Labor, machinery etc. Personal Income is income which comesPersonal Income is income which comes

from saving accounts, get dividends fromfrom saving accounts, get dividends from

shares, get interest rate.shares, get interest rate.

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ROLE OF GOVERNMENTROLE OF GOVERNMENT

overnment collects si!eable share ofovernment collects si!eable share of

national income through ta"ation.national income through ta"ation.

Personal Income Ta"Personal Income Ta" #orporate Profit Ta"#orporate Profit Ta"

$hat ovt. Ta", they also spend or give$hat ovt. Ta", they also spend or give

away.away. overnments at all levels provide incomesovernments at all levels provide incomes

in the form ofin the form of Tran!er Pa"ment.Tran!er Pa"ment.

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WEALTHWEALTH

$ealth consists of the net dollar value of$ealth consists of the net dollar value of

assets owned at a given point in time.assets owned at a given point in time.

$ealth is a stoc& 'li&e the volume of the$ealth is a stoc& 'li&e the volume of thela&e( while income is a flow per unit ofla&e( while income is a flow per unit of

time 'li&e the unit of stream(time 'li&e the unit of stream(

) households* wealth includes its tangible ) households* wealth includes its tangible

items 'houses, cars , land( and its financialitems 'houses, cars , land( and its financial

holdings 'cash, savings account(holdings 'cash, savings account(

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THEOR# OF INCOMETHEOR# OF INCOME

DISTRI$%TIONDISTRI$%TION

$hy are there differences in incomes of$hy are there differences in incomes of

different familiesdifferent families

)re they caused by differences in talents )re they caused by differences in talents -y monopoly power-y monopoly power

$hy are land prices so much higher in the$hy are land prices so much higher in the

city than in the desertcity than in the desert istribution theory answers.istribution theory answers.

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$ages are the price of labor.$ages are the price of labor.

0ents are price of using land.0ents are price of using land.

The Prices of factors of production areThe Prices of factors of production areprimarily set by the interaction betweenprimarily set by the interaction between

supply and demand for different factors.supply and demand for different factors.

)s, prices of goods are largely determined )s, prices of goods are largely determinedby the supply and demand for goods.by the supply and demand for goods.

THEOR# OF INCOMETHEOR# OF INCOME

DISTRI$%TIONDISTRI$%TION


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THE NAT%RE OF FACTORTHE NAT%RE OF FACTOR

DEMANDSDEMANDS The demand for factors differs from thatThe demand for factors differs from that

for consumption goods in two importantfor consumption goods in two important

respectsrespects

'1('1( actor demands are derived demandsactor demands are derived demands

'2('2( actor demands are interdependentactor demands are interdependentdemandsdemands

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DERIVED DEMANDSDERIVED DEMANDS

$hen firms demand an input, they do so$hen firms demand an input, they do sobecause that inputs permits them to producebecause that inputs permits them to producegood which consumers desire now or in thegood which consumers desire now or in the

future.future. The more customers will be satisfied by aThe more customers will be satisfied by a

certain product, the more company has tocertain product, the more company has toproduce that product and in result the greaterproduce that product and in result the greater

will be demand for raw material an other inputs.will be demand for raw material an other inputs. 5"5" 5ntertainment T6 #hannels, 7obile5ntertainment T6 #hannels, 7obile

#ompanies, Pi!!a 8ut etc.#ompanies, Pi!!a 8ut etc.

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&%ESTION&%ESTION

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INTERDEPENDENTINTERDEPENDENT

DEMANDSDEMANDS It says that, Production is a team effort.It says that, Production is a team effort.

The productivity of one factor, such as labor,The productivity of one factor, such as labor,

depends upon the amount of other factors availabledepends upon the amount of other factors available

to wor& with.to wor& with. )s&ing which factor is more important is li&e as&ing )s&ing which factor is more important is li&e as&ing

whether a mother or a father is more essential inwhether a mother or a father is more essential in

producing a babyproducing a baby

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DISTRI$%TION THEOR#DISTRI$%TION THEOR#

The fundamental point about distributionThe fundamental point about distribution

theory is that the demands for the varioustheory is that the demands for the various

factors of production are derived from thefactors of production are derived from the

revenues that each factor yields on itsrevenues that each factor yields on its

marginal product.marginal product.

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MARGINAL REVEN%EMARGINAL REVEN%E

PROD%CTPROD%CT It represents the additional revenue a firmIt represents the additional revenue a firm

earns from using an additional unit of anearns from using an additional unit of an

inputinput

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Lec 18-19 How Markets Determine Incomes.ppt

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