- In
a market system, income is determined by the market value of the productive
resources one sells. What workers earn depends, primarily, on the
market value of what they produce and how productive they are (economists
refer to the demand for resources as a derived demand, that
is, derived from the goods and services that the resource is able
to produce.) Wages and salaries - the prices of labor services - are
determined just as other prices are, by the interaction of buyers
and sellers. The buyers of labor services are the employers. They
are willing to pay higher wages and salaries to those employees who
can produce more or better goods or services in a given amount of
time.
- To
earn income, people sell productive resources. These include their
labor, capital, natural resources and entrepreneurial talents.
A wage or salary is the price of labor; it usually is determined by
the supply and demand for labor. More productive workers are likely
to be of greater value to employers and earn higher wages than less
productive workers. Furthermore, people's incomes, in part, reflect
choices they have made about education, training, skill development
(what economists call human capital) and careers. Workers can
improve their productivity by improving their human capital. They
can also improve their productivity by using physical capital, such
as tools and machinery. Increases in productivity can also happen
because of technological advances. People with few skills are more
likely to be poor. However, changes in the structure of the economy,
the level of gross domestic product (GDP),
technology, government policies, and discrimination can influence
personal income.
- Investments
in physical and or human capital involves a tradeoff of lower current
consumption in anticipation of greater future production and consumption.
- Labor
is a human resource that is used to produce goods and services. People
earn income by exchanging human resources (physical or mental work)
for wages and salaries. Employers are willing to pay wages and salaries
to workers because they expect to be able to sell the goods and services
that those workers produce at prices high enough to cover the wages
and salaries and all other costs of production.
- In
a labor market, in the absence of other changes, if wage or salary
payments increase, workers will increase the quantity of labor they
supply (a movement along the supply curve of labor) and firms will
decrease the quantity of labor they demand (a movement along the demand
curve for labor).
- Changes
in the prices for productive resources affect the incomes of the owners
of those productive resources and the combination of those resources
used by firms. Changes in demand for specific goods and services often
affect the incomes of the workers who make those goods and services.
- Two
methods for classifying how income is distributed in a nation - the
personal distribution of income and the functional distribution -
reflect, respectively, the distribution of income among different
groups of households and the distribution of income among different
businesses and occupations in the economy.
- Entrepreneurs
are people who take the risks of organizing productive resources to
produce goods and services. Profit is an important incentive that
leads entrepreneurs to accept the risks of business failures. In addition
to profits, entrepreneurs respond to other incentives including the
opportunity to be their own boss, the chance to achieve recognition,
and the satisfaction of creating new products or improving existing
ones. In addition to financial losses, other disincentives to which
entrepreneurs respond include the responsibility, long hours, and
stress of running a business. Entrepreneurial decisions affect job
opportunities for other workers. Furthermore, entrepreneurial decisions
are influenced by government tax and regulation policies.
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