Final answer:
Income in a market economy like the United States is determined by the ownership of resources and their value to society. Most people earn their income through wages, salaries, and other labor income, which depend on the number of hours worked and the wage rate. The wage rate is determined by the demand and supply of labor, with higher wages attracting more workers.
Step-by-step explanation:
The wage rate that a person earns is a function of two variables:
In a market economy like the United States, income comes from ownership of the means of production: resources or assets. One's income is a function of the quantity of each resource one owns and the value society places on those resources. For most people, the most important resource they own is their labor. So, the majority of their income comes from wages, salaries, commissions, and tips. A person's labor income depends on the number of hours they work and the wage rate an employer is willing to pay for those hours. Additionally, people may earn income from real estate or financial assets like bank accounts, stocks, and bonds.
What Determines the Going Market Wage Rate?
In the labor market, the wage rate is determined by the demand and supply curves. The demand for labor curve shows that as the wage rate increases, the demand for labor decreases. The market demand for labor is the total of all firms' demands for labor. On the other hand, the supply of labor curve shows that as the wage rate increases, the supply of labor also increases. This is because higher wages attract more people to seek jobs. The market supply of labor is the total of all individuals' supplies of labor.
Wages are usually determined by the supply and demand for labor, as well as the skills, education, and training people possess. When services are in high demand and in short supply, wages tend to be higher. Conversely, when many people are unemployed and jobs are scarce, wages tend to be lower. Businesses can maintain or increase profits by not increasing workers' wages in such scenarios.