HOW MARKETS

DETERMINE INCOMES

INCOME

Income refers to the flow of wages,

interest payments, dividends, and other
things of value accruing during a period of
time.
The aggregate total of all incomes is
national income.
The biggest share of national income goes
to labor, either as wages or salaries or as
fringe benefits.
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FACTOR INCOMES VS.

PERSONAL INCOMES

Income which comes from factors of

production.
Land, Labor, machinery etc.
Personal Income is income which comes
from saving accounts, get dividends from
shares, get interest rate.

ROLE OF GOVERNMENT

Government collects sizeable share of

national income through taxation.
Personal Income Tax
Corporate Profit Tax
What Govt. Tax, they also spend or give
away.
Governments at all levels provide incomes
in the form of Transfer Payments.
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WEALTH

Wealth consists of the net dollar value of

assets owned at a given point in time.
Wealth is a stock (like the volume of the
lake) while income is a flow per unit of
time (like the unit of stream)
A households' wealth includes its tangible
items (houses, cars , land) and its financial
holdings (cash, savings account)
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THEORY OF INCOME
DISTRIBUTION

Why are there differences in incomes of

different families?
Are they caused by differences in talents?
By monopoly power?
Why are land prices so much higher in the
city than in the desert?
Distribution theory answers.
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THEORY OF INCOME
DISTRIBUTION

Wages are the price of labor.

Rents are price of using land.
The Prices of factors of production are
primarily set by the interaction between
supply and demand for different factors.
As, prices of goods are largely determined
by the supply and demand for goods.

THE NATURE OF FACTOR

DEMANDS

The demand for factors differs from that

for consumption goods in two important
respects:
(1) Factor demands are derived demands
(2) Factor demands are interdependent
demands

DERIVED DEMANDS

When firms demand an input, they do so

because that inputs permits them to produce
good which consumers desire now or in the
future.
The more customers will be satisfied by a
certain product, the more company has to
produce that product and in result the greater
will be demand for raw material an other inputs.
Ex:
Entertainment TV Channels, Mobile
Companies, Pizza Hut etc.
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QUESTION

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INTERDEPENDENT
DEMANDS

It says that, Production is a team effort.

The productivity of one factor, such as labor,
depends upon the amount of other factors available
to work with.
Asking which factor is more important is like asking
whether a mother or a father is more essential in
producing a baby

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DISTRIBUTION THEORY

The fundamental point about distribution

theory is that the demands for the various
factors of production are derived from the
revenues that each factor yields on its
marginal product.

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MARGINAL REVENUE
PRODUCT

It represents the additional revenue a firm

earns from using an additional unit of an
input

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