By Brendan Sheehan (auth.)
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User cost measures the sacrifice involved in using the equipment rather than leaving it idle. In other words user cost is equal to the excess of the estimated value of capital equipment if it had not been used to produce output over the actual 40 Understanding Keynes’ General Theory value of the equipment at the end of the production period. This user cost is then added to the factor cost of the entrepreneur to calculate the prime cost of producing output. Hence the income for an entrepreneur within a specific time period is equal to “the excess of the value of his finished output sold during the period over his prime cost” (Keynes, 2007, p.
Keynes accepts the classical assertion that money is held for three main purposes: 1. as a means of exchange for personal transactions; 2. as a means of exchange for business transactions; and 3. as a “store of value”. He then examines how, from the standpoint of a depositor, bank money fulfils these purposes. First there is the individual or household that 22 Understanding Keynes’ General Theory holds money to cover the interval between receiving personal income and spending it in various ways determined by personal preferences.
That each firm in every industry demands workers until the marginal product of the last worker just equals the real wage rate paid to the last worker; and that as the marginal product of each additional worker declines, due to the law of diminishing productivity, each firm in every industry will only demand more workers if the real wage rate is lowered. In this way the classical school derives a downward sloping labour demand curve for an industry. When they transfer the argument to the economy as a whole they simply assume that what is true for each firm and industry must also be true for the macroeconomy.