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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