# CHAPTER 12 HOW MARKETS DETERMINE INCOMES

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CHAPTER 12 HOW MARKETS DETERMINE INCOMES
how pricing and employment decisions are made in input markets? How are wage rates determined, land rents?

Income and Wealth The 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.

Income is a flow of money;
wealth is a stock of accumulated economic assets

Chapter 12 Table 12-1

The Share of Labor in National Income
Chapter 12 Figure 12-1 The Share of Labor in National Income

Chapter 12 Table 12-2

Role of government Sometimes, governments take actions to redistribute income and wealth in a society. Taxes Transfer payments.

Input Pricing by Marginal Productivity
The demand for any factor of production is 1- Derived demand. 2- interdependent

Derived demand means 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 miners Ex demand for computer chips

Demand for Factors Is Derived from Demand for Goods They Produce
Chapter 12 Figure 12-2 Demand for Factors Is Derived from Demand for Goods They Produce

interdependent Interdependence exists among factors of production,
This interdependence occurs because most inputs in a production process are complements Although 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.

Chapter 12 Table 12-3

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.

Demand for Inputs Derived through Marginal Revenue Products
Chapter 12 Figure 12-3 Demand for Inputs Derived through Marginal Revenue Products

Chapter 27 Table 27-4

The least-cost rule It states that a firm will hire its optimal combination of inputs when each input’s marginal revenue product is equal to its price.

Supply Curve for Factors of Production
Chapter 12 Figure 12-4 Supply Curve for Factors of Production

The Markets for Surgeons and Fast-Food Workers
Chapter 12 Figure 12-6 The Markets for Surgeons and Fast-Food Workers

Marginal Product Principles Determine Factor Distribution of Income
Chapter 12 Figure 12-8 Marginal Product Principles Determine Factor Distribution of Income