Key Economic Concepts: Income, Labor, and Market Externalities

Income and Wealth Distribution

Income is the total income received by owners of production factors. Income distribution refers to how income is allocated among the owners of factors of production as wages, rents, interest, and benefits. The wealth of a country is the net value of its tangible, physical, and financial assets.

Labor Market Dynamics

• Labor demand: The number of people companies are willing to hire at each wage level.
• Money wage: The set of income received by workers in cash or kind for the provision of labor services.
• Unemployment rate: The percentage of the unemployed population relative to the total active population.
• Human capital accumulation: Investment in people, mainly through education and on-the-job training.
• Compensating differentials: Wage differences that exist due to the non-monetary characteristics of different jobs.

Capital and Economic Rent

Interest is defined as payment for capital services or, more specifically, as the price of a loan, influenced by the risk of the operation and the warranty period. Economic rent is the return of a factor of production above its opportunity cost.

Types of Unemployment

• Frictional unemployment: Caused by the rotation between jobs and job searching; it usually has a short duration.
• Structural unemployment: Caused by labor market mismatches.

Market Externalities and Public Goods

Negative externalities occur when markets produce a larger quantity than is socially desirable. Internalizing an externality involves altering incentives to encourage individuals to take into account the external effects of their actions. Positive externalities occur when markets produce a smaller amount than is socially desirable.

Public goods are goods where the cost of extending service to an additional person is zero and whose enjoyment is impossible to exclude anyone from. A free rider (consumer parasite) is a person who receives the benefit of a good but avoids paying for it. Common resources are goods that are rival but not excludable. The tragedy of the commons explains that common resources are used more than is desirable from the standpoint of society as a whole.