Income DistributionCircular FlowFigure 1 The Circular FlowPowerPoint PresentationWage DeterminationDifferences in WagesTable 1 Average Annual Earnings by Educational AttainmentAbove Equilibrium WagesIncome DistributionCircular Flow•The circular flow diagram shows that income to the resources comes from the resource markets.•A person’s income depends upon two factors:–How much of the resource do they have?–What price will the resource bring?•The resources are labor, entreprenuership, capital, and natural resources (%of national income)–Labor (57%)–Proprietor (7%), Corporate Profits (8%)–Interest (7%)–Rent (1%)Figure 1 The Circular FlowCopyright © 2004 South-WesternSpendingGoods andservicesboughtRevenueGoodsand servicessoldLabor, land,and capitalIncome = Flow of inputs and outputs = Flow of dollarsFactors ofproductionWages, rent,and profit FIRMS•Produce and sellgoods and services•Hire and use factorsof production •Buy and consumegoods and services•Own and sell factorsof productionHOUSEHOLDS •Households sell•Firms buyMARKETSFORFACTORS OF PRODUCTION •Firms sell•Households buyMARKETSFORGOODS AND SERVICES•The primary source of income for most Americans comes from labor•The supply and demand for labor determine: –How much labor do they provide/used?–How much does labor get paid?–Demand for labor is a derived demand. Business firms employ labor to produce and sell output.•Hire labor until the MBL=MCL–Supply of labor is a decision of households that comes from a choice between work, and hence income and the ability to buy goods and services, and leisure. They will supply labor until the MBW=MCW. The benefits are satisfaction from goods and services and the costs are the satisfaction lost from forgone leisure.Wage Determination•The relationship between the demand for labor and the wage rate is negative or the demand curve for labor is down-ward sloping.•The relationship between the supply of labor and the wage rate is psotive or the supply curve of labor is up-ward sloping.Differences in Wages•Compensating Differentials: providing incentives to overcome such differences as difficulty, stress, danger, and nightwork. These rise the MC of supplying labor.•Human Capital: higher skills result in greater productivity. Human capital increases the MB of hiring labor.–EducationTable 1 Average Annual Earnings by Educational AttainmentCopyright©2004 South-WesternAbove Equilibrium Wages•The minimum wage – a legally set price floor for wages.•Collective bargaining – agreement among workers to bargain together through a union for wages. •Efficiency Wages – wages paid to increase productivity and/or reduce worker
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