marginal revenue and income money! money! money! revenue in market systems

MARGINAL REVENUE AND INCOME

MONEY! MONEY! MONEY!

Revenue in Market Systems

Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Number of Businesses

Very many Many Few One

Standard Product

always Never Sometimes Not applicable

Entry & Exit Very easy Fairly easy Difficult Very difficult

Market Power

none Some Some great

Example farming Restaurants Automobile manufacturing

Public utilities

Revenue & Perfect Competition

Average Revenue- business’s total revenue per unit of output. AR= TR/Q

Marginal Revenue- The extra total revenue earned from an additional unit of output. MR=^TR/^Q

Marginal Revenue Product- The change of total revenue associated with employing each new unit of resource. TR2-TR1= Marginal Revenue Product.

Revenue and Perfect Competion

Wages and Salaries

Increases in demand and decreases in supply cause wages to be higher whereas decreases in demand and increases in supply cause wages to be lower

Demand, Supply & Wages of Plumbers in a Canadian City (fig.8.2/8.3) p. 160

D2

Shortage

Number of Plumbers

(wag

es p

er h

our

(dol

lars

)

30

10

20

400200 300 500 600100

25

A decrease in the demand for plumbers

D2

Surplus

Number of Plumbers

(wag

es p

er h

our

(dol

lars

)

30

10

20

400200 300 500 600100

25

15

S2

A Decrease in the Supply of Plumbers

Shortage

Number of Plumbers

(Wag

es p

er h

our

($)

30

10

20

400200 300 500 600100

25

15

S2

An increase in the Supply of Plumbers

Surplus

Number of Plumbers

(Wag

es p

er h

our

($)

30

10

20

400200 300 500 600100

25

15

Profit Maximization

Produce the quantity of output where Marginal Revenue and Marginal cost intersect.

Market for Labour

Marginal Productivity Theory: the theory that businesses use resources on the basis of how much extra profit these resources provide. Will only hire more

people if they will make money with this extra person.

Wages and Determinants

7 different determinantsLabour Productivity, Education, Experience,

Job Conditions, Regional Disparities, Market Power, Discriminations.

Labour Productivity

The output per worker in a given time determines the wage of that work.

Education

The more education a worker needs to perform a job, the higher is the pay. Work that has job-related training tends to have a higher marginal revenue. Thus, education effects labour demand.

Also effect on supply-Human Capital- the income earning potential of a person’s skills and knowledge.

Experience

On the job experience increases a worker’s productivity-pushing up the demand for the worker’s labour and wage rate.

Seniority rights allows older workers to be paide more.

Job Conditions

Sometimes there are certain jobs that are less appealing thus in order to attract workers employers offer higher wages. E.g Garbage collectors

Regional Disparities

Wage differences also have a geographic dimension. For example a fisherman in BC may earn more than a

fisherman in Newfoundland. Or a teacher in Canada will earn more than a

international teacher in Cairo.

Market Power

The market power workers have also effect their wages. We will look at Unions in more detail later.

Discrimination

Job Discrimination also has an effect for example someone is hired based on a trait rather than credentials. E.g. Race, sex, or physical ability.

Forms of Income

Rent: Payment for the use of a resource, specifically land

Interest: Price paid to a lender for the use of a sum of money over a period of time

Savings: Part of income that is not spent on goods and services

Forms of Income: Profit

What is left over after all the costs have been paid for from the revenue earned by the business (i.e. Total Revenue – Total Costs)

Reward to the entrepreneur for taking the risk of starting a business

Prime motivator to start a business and run it well to satisfy the wants and needs of consumers

Circular Flow Model