Superphysics
Chapter 6

# The Definition of Income, Saving and Investment

##### 4 minutes  • 752 words

Here are my definitions:

• `Sales` is an entrepreneur’s income from a sale of a product
• `Purchases` is his expense in buying that product from his supplier
• `Assets` is his expense for capital equipment
• This includes his unfinished goods (working capital) and finished goods
• `Maintenance` is the cost of maintaining the assets

My equations are: `Depreciated Asset Value = Asset - Maintenance`

`Gross Sales + Assets - Purchases`

Some part, however, of `Gross Sales` will be attributable to the capital equipment which he had at the start.

The income of the current period is obtained by deducting from `A + G - A1` a certain sum, to represent that part of its value which has been contributed by the equipment inherited from the previous period.

The problem of defining income is solved as soon as we have found a satisfactory method for calculating this deduction.

There are 2 possible principles for calculating it:

1. In connection with production
2. In connection with consumption

## Income Defined by Production

(i) The actual value `Assets` is the net result of the cost of maintaining and depreciating it.

This cost is `Maintenance`. Therefore:

`Depreciated Asset Value = Asset - Maintenance`

is the maximum net value which might have been conserved from the previous period, if it had not been used to produce `A`

`Savings = Depreciated Asset Value - `

The excess of this potential value of the equipment over `Assets - Purchases` is the measure of what has been sacrificed (one way or another) to produce `Sales`.

This is the `User Cost` [1]

The user cost of `Sales` is Depreciated Asset Value - B’ - Asset - Purchases

`(G' - B') - (G - A1)`

• This measures the sacrifice of value involved in the production of `Sales`

The factor cost of `Sales` is the amount paid out by the entrepreneur to the other factors of production.

The prime cost of the output `Sales` is the sum of the `Factor Cost` and the `User Cost`.

The income[2] of the entrepreneur is the excess of the value of his finished output sold over his prime cost.

• This depends on his scale of production which he wants to maximise, i.e., to his gross profit

The income of the rest of the community is equal to the entrepreneur’s factor cost.

`Aggregate income = Sales - User Cost`

Income therefore is a completely unambiguous quantity.

The entrepreneur expects profits.

• He endeavours to maximise those profits.
• From this, he decides how much employment to give

`Assets - Purchases` might exceed `Depreciated Value - B'` so that user cost will be negative.

For example, this might be the case:

• if we choose our period in such a way that input has been increasing during the period but without there having been time for the increased output to reach the stage of being finished and sold.
• whenever there is positive investment, if we imagine industry to be so much integrated that entrepreneurs make most of their equipment for themselves.

`User Cost` is only negative when the entrepreneur has been increasing his capital equipment by his own labour.

• This is usually positive.

Marginal `User Cost` associated with an increase in `Sales` is `dUser_Cost / dSales`

• This will be negative

For society as a whole:

• `Aggregate Consumption = Summation of Sales - Summation of Purchases`
• `Aggregate Investment = Summation of Purchases - User Cost` is equal to

`User Cost` is the individual entrepreneur’s disinvestment

`-User Cost` is his investment in terms of his own assets.

`-User Cost = Assets - () `

A completely vertically integrated system has `Purchases = 0`

• Its `Consumption = Sales`
• Its `Investment = -User Cost

The introduction of complicates the above.

The effective demand is simply the gross income which the entrepreneurs expect to receive.

• This includes the incomes which they will hand on to other factors of production, from the amount of current employment.

The aggregate demand curve is the hypothetical quantity of employment related to the income from their outputs.

The effective demand is the point on the aggregate demand curve which corresponds to the level of employment which maximises the entrepreneur’s expectation of profit*.

*Superphysics note: This proves that the effective demand of Neoclassical Economics is based on the supplier and not the demander

From here, we can equate the marginal income to the marginal factor cost.

• This leads to the same propositions relating marginal income to marginal factor costs.
• This ignores user cost or assumes it to be 0.
• In this way, they have equated supply price[3] to marginal factor cost.[4]