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Lecture 12

ECO105Y1 Lecture Notes - Lecture 12: Bes, Tax Rate, James Heckman


Department
Economics
Course Code
ECO105Y1
Professor
Avi Cohen
Lecture
12

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ECON 105
2015/2016
Lecture 12
18 January 2016
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2INCOMES ARE PRICES AND QUANTITIES
IN INPUT MARKETS
Incomes are determined by prices and quantities in input markets, wh
ere households supply to businesses labour, capital, land, and entre
preneurship in exchange for wages, interest, rent, and profits.
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·In input markets, households are sellers and businesses are buyers
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4Inputs and Income
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·Income — what you earn — is a flow
·Flow
amount per unit of time
·Income for labour, capital, and land
= price of input x quantity of input
· Wealth — total value of assets you own — is a stock
·Stock
fixed amount at a moment in time
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·Key concepts for explaining input incomes are
·marginal revenue product for labour
·present value for capital
·economic rent for land
·Entrepreneurs earn profits
·Entrepreneurs’ incomes not determined by
price x quantity
·Economic profits are a residual —
what is left over from revenues after
all opportunity costs of production
(including normal profits) have been paid
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7LABOUR AND MARGINAL REVENUE PRODUCT
For maximum profits, businesses should hire additional labour when m
arginal revenue product is greater than marginal cost.

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ECON 105
2015/2016
Lecture 12
18 January 2016
2
8
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·To hire labour, business must pay the market wage reflecting the bes
t opportunity cost of input owner
·Business demand for labour is a derived demand — demand for output
and profits businesses can derive from hiring labour
·Marginal product
additional output from hiring one more unit of labour
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·When businesses hire additional labourers there is diminishing margi
nal productivity — as you add
more of a variable input to fixed inputs,
marginal product of variable input eventually diminishes
·Marginal revenue product
additional revenue from selling output produced by
an additional labourer
·Marginal revenue product =
marginal product x price of output
·Marginal revenue product diminishes
for additional labourers
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·Recipe for maximum profits for business
·hire additional inputs when
marginal revenue product is greater than marginal cost
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11 Labour Hiring Decision for
Wahid’s Web Wonders Business
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12 Marginal Revenue Product
and the Wage Rate
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13 Marginal Revenue Product Curve
and Marginal Cost Curve
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·Recipe for maximum profits for business —
hire additional inputs when
marginal revenue product is greater than marginal cost
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