Presentation on theme: "CHAPTER 12 HOW MARKETS DETERMINE INCOMES"— Presentation transcript:
1 CHAPTER 12 HOW MARKETS DETERMINE INCOMES how pricing and employment decisions are made in input markets?How are wage rates determined, land rents?
2 Income and WealthThe theory of the distribution of income is concerned with(1) the determination of income,(2) the allocation of total product among factors of production.So we need to understand how income is generated in an economy.wages, rent, interest, and profits are distributed across the owners of labor, land, and capital.
3 Income is a flow of money; wealth is a stock of accumulated economic assets
7 Role of governmentSometimes, governments take actions to redistribute income and wealth in a society.TaxesTransfer payments.
8 Input Pricing by Marginal Productivity The demand for any factor of production is1- Derived demand.2- interdependent
9 Derived demandmeans that the demand for the factor depends upon, or is derived from, the demand for the final product that it helps to produce.Ex demand for coal minersEx demand for computer chips
10 Demand for Factors Is Derived from Demand for Goods They Produce Chapter 12 Figure 12-2Demand for Factors Is Derived from Demand for Goods They Produce
11 interdependent Interdependence exists among factors of production, This interdependence occurs because most inputs in a production process are complementsAlthough there is often some substitutability across factors, it is rare that inputs are perfect substitutes.Ex: it is rare that a firm could use all land and no labor, or all labor and no land.
13 Demand for any input depends directly, upon the productivity of that factor the demand for an input will be defined (valued ) by its marginal revenue product (MRP).Marginal revenue product measures the addition to total revenue that occurs when a firm hires an additional unit of an input.MRP translates marginal product, which is measured in output units, to a meaningful dollar figure.To calculate MRP, multiply the marginal product of the input by the marginal revenue.
14 Demand for Inputs Derived through Marginal Revenue Products Chapter 12 Figure 12-3Demand for Inputs Derived through Marginal Revenue Products