Summary of Chapter 6

Firstly let us define what is meant by income. In order to do so let us define a number of components which can be used to assist us in our definition.

Define A as the Finished Output sold to the consumer. This also constitutes the Gross Income of the entrepreneur.
Define A1 as the cost of purchase of other entrepreneurs output which is also considered expenditure.
Let G represent Capital equipment (Stocks, unfinished goods and working capital)

Income can then be quantified as A + G – A1 less a certain sum contributed by the previous period. There are two methods used to calculate this sum which are as follows:

If entrepreneur decided not to produce output there is still an optimal sum (B’) which it would have paid him to maintain his Capital equipment.

G’ is max value of G at the end of the time period after spending B’.

Therefore G’-B’ is the max net value of G if no production had taken place but B’ had been spent maintaining/improving the equipment.

(G’ – B’) – (G – A1) is the User Cost of A denoted as U.

· The (F) Factor cost of A is the amount paid by the entrepreneur for other services.

· The sum of F and U are known as the prime cost of A.

· Aggregate income is A – U.

· Aggregate consumption (C) of the period is equal to ∑ (A – A1).

· Aggregate investment (I) is equal to ∑ (A – U).

· The effective demand is the aggregate income entrepreneur expects to receive.

(ii)
Supplementary cost = unquantifiable but those deductions from his income the entrepreneur makes before reckoning what he considers his income for the purpose of declaring a dividend.

Involuntary loss = Supplementary cost = V = involuntary depreciation

Net income = A – U – V



What is saving?
Saving is the “excess income over expenditure on consumption”, where expenditure on consumption means the value of good sold over a period.
If income if defined as A – U, and consumption is defined as A – A1 it follows that saving is equal to A1 – U. ( A – U – (A – A1) )
Net Savings then = A1 – U – V where V = supplementary costs.

Finally what is investment?
Income = value of output = consumption + investment
Saving = income – consumption
Substituting equation …. Saving + consumption = consumption + investment
Thus Saving = investment