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Presentation03-FirmsMarketsandIncome1.pptxFirms, Markets, and Income
Firms, Markets, and Income
Firms
Corporations
Partnerships
Single Proprietorships
Firms as units of capital
Capitalists see firms as an investment that is expected to generate a stream of profits over time.
Firms are generally beyond the reach of most workers (i.e., too expensive to purchase).
Firms, Markets, and Income
Capitalists
Industrial capitalists
Commercial capitalists
Financial capitalists
Capitalists v entrepreneurs
Capitalists v rentiers
Firms, Markets, and Income
Firm profits distributed in following ways
Dividends
Retained earnings
For gross investment (depreciation and/or net investment)
Rent seeking (lobbying government, influencing legislation, etc.)
Firms, Markets, and Income
Inputs to firms and flows of income
Labor
Labor of employees - wages and salaries
Labor of owners – compensation for their labor also called wages. Estimate.
Wages represent the return to labor, both employees and owner’s labor.
Capital
Fixed and Circulating reproducible goods
Financial capital
Profit a return to the firm (physical capital). Interest a return to loans (financial capital).
Land
Non-reproducible.
Firms consider it as a form of capital
Rent a return to land
Finance
Interest a return to money
Firms, Markets, and Income
The firm as a unit of capital (K)
Assets = Capital (Fixed & Circulating), Land, Financial Assets
Liabilities = various loans and balance on lines of credit
The Value of the Firm = Net Worth
Net Worth (K) = Assets – Liabilities
Return on Investment in Firm (Value of Firm) = Profits ()
Rate of return (rate of profit) = r = /K
Firms, Markets, and Income
Markets
Creative destruction
Firms are forever searching for monopoly profits
Entry and exit of firms into markets keeps pressure on prices and thus profits
Firms seek to avoid competition by investing in new technologies
Competition also avoided through rent-seeking (gaining legislation and rules that favor them)
Capitalist market economies cannot operate without
Brokers
Money – finance - banking
Firms, Markets, and Income
Classical Circular Flow Model
The model ignores the role of government and foreign trade
Workers offer labor and are paid wages
Workers consume all their wages – no savings (for the class as a whole)
Capitalists manage their firms by hiring labor to produce and sell output
Profits (surplus) equals the difference between value of output and wages.
Capitalists consume and invest their profits
Firms, Markets, and Income
Classical Circular Flow
Firms, Markets, and Income
Classic Circular Flow
Y = W + Π
E = Cw + Ck + Ig
Y = E ==> W + Π = Cw + Ck + Ig
Sw = W - Cw
Sk = Π - Ck
S = Sw + Sk = Ig
System reproducing itself perfectly, in equilibrium, when
Y = E
S = Ig
Firms, Markets, and Income
If Y > E
Then S > Ig,
Inventories growing unintentionally,
production and employment start to slow down
If Y < E
Then S < Ig,
Inventories depleting unintentionally,
Production and employment start to pick up
Firms, Markets, and Income
Investment, capital accumulation, drives the system
,
Sw = W – Cw = sw・W, where sw = Sw/W
Sk = – Ck = sk・, where sk = Sk/
Y = E -->
substituting (Y - for W
solving for
or
, when = 0
