Chapter 18 Econ

Market income

Income before taxes or transfers (e.g., wage).

Total income

Market income + government payments (e.g., benefits).

Mean, Median, mode

Mean - Average income

Medan - middle income

Mode- most common income

Key Rule

Mean > Median > Mode.

Shape of income distribution

Positively skewed; long tail of high income.

Lorenz Curve

Shows income distribution; x-axis = households, y-axis = income.

Closer to equality line = more equal; farther = less equal.

Gini Coefficient

Measure of inequality ranging from 0 (equal) to 1 (unequal).

Higher Gini = more inequality.

Complete inequality = 1

Complete Equality = 0.

Wealth

Assets (e.g., house).

Income

Flow of earnings (e.g., salary).

Wealth vs Income

Wealth is more unequal.

Global Inequality

Between countries > within countries; why rich vs poor countries.

Labour market

Human capital; skills/education (e.g., degree).

Technology

Low skill → replaced, High skill → rewarded.

Discrimination

Unequal treatment (e.g., gender).

Superstars

Winner takes most (e.g., athlete).

Wealth inheritance

Significant source of inequality.

Supply side economics

High supply → low wage (e.g., workers).

Productivity

Higher productivity → higher wage.

Redistribution

Methods: Taxes, Transfers, Services.

Trade-off

Equity vs Efficiency; more equality = less incentive = smaller economy.

Poverty Solution

Long run: education + skills; Short run: transfers.

Non-economic reasons of income inequality?

Motivation, inheritance, access to credit, social mobility, bargaining power.

What is bargaining power?

Ability to negotiate for higher wages.

Supply reasons for inequality?

Education, skills, licensing requirements.

What happens if supply of workers is high?

High supply of workers results in low pay.

Demand reasons for inequality?

Education, human capital, marginal product, marginal revenue product.

What happens if demand for workers is high?

High demand = high pay.

What is human capital?

Skills and knowledge that increase worker value.

What is a regressive tax?

Higher percent on poor, lower percent on rich.

Sales tax

Gas Tax

What is a progressive tax?

Higher percent for rich, lower for poor.

income tax

Estate,

interest,

investment taxes

What happens to tax rate as income increases?

Marginal tax rates increase.

What is proportional tax?

Same percentage for everyone.

Tax effects on lorenz cure

Proportional tax- no shift

regressive tax - outward shift

Proggressive tax - inward shift

What is a transfer payment?

Any time the government gives money.