Chapter 12 Flashcards
Four types of inputs provided by households
- Capital
- Land
- Labor
- Entrepreneurship
Four types of income associated with the inputs
Capital = interest
Land = rent
Labour = wages
Entrepreneurship = profits
Income
This is a flow
Wealth
This is a stock
What should businesses consider when choosing to buy labor?
Derived demand
Derived demand
This is when the demand for one thing depends on the other
Marginal product
The additional output from hiring more labor
When will marginal products fall?
In businesses that have fixed costs (operating at near capacity)
When more workers are hired, the marginal product decreases
Marginal revenue product
The additional revenue received by selling the marginal product
When will marginal revenue products fall?
In businesses that have fixed costs.
When more workers are hired, marginal productive revenue decreases
How to maximize profits in labor?
Higher more workers when marginal revenue product is greater than marginal cost
What should businesses consider when choosing to buy capital?
Present value
Present value
The future value of money that is currently invested
Formula for present value
amount of money available in n years / (1 + interest rate)^n
n = number of years
How to maximize profits in capital?
The present value should be greater than the amount of money invested
What should businesses consider when choosing to buy land?
Economic rent
Economic rent
This is the income paid for an input in inelastic supply (land)
Relationship between input prices and output prices
High input prices = high output prices
Human capital
The chance of earning better if you have work experience, education, and on-the-job training
Two things governments do to reduce poverty
- By providing education and training
- By using tax and transfer systems
Three types of tax
- Progressive tax
- Regressive tax
- Proportional tax
Progressive tax
The amount of tax increases as your income increases
Regressive tax
The amount of tax decreases as your income increases
Proportional tax
The amount of tax stays the same regardless of your income
Transfer payments
These are payments made by the government to households
