Income Inequality & Tax Incidence Study Guide

Flashcards covering key concepts from income inequality, tax incidence, and resource markets.

Income Inequality

Refers to how unevenly income is distributed among households in an economy.

Quintiles

Households divided into quintiles, representing 20% of households ranked by income.

Lorenz Curve

Shows the cumulative distribution of income with a horizontal axis for households and a vertical axis for income.

Line of Equality

Represents perfect equality, where each percentage of households earns an equal percentage of income.

Gini Ratio

Measures income inequality numerically, ranging from 0 (perfect equality) to 1 (perfect inequality).

Income Mobility

Describes how households can move between income quintiles due to education, promotions, or unemployment.

Progressive Tax System

A tax system where higher-income earners pay a higher percentage of their income.

Transfer Payments

Redistribute income without producing goods or services; includes Social Security and unemployment compensation.

Benefits-Received Principle

States those who benefit from a public good should pay for it.

Ability-to-Pay Principle

Taxes based on income level, where higher income equates to a higher tax burden.

Regressive Tax

A tax system where lower incomes pay a higher percentage of their income, such as sales tax.

Tax Incidence

Refers to who actually bears the burden of a tax, regardless of legal imposition.

Elastic Demand

When consumers are price-sensitive, leading to producers bearing more of the tax burden.

Inelastic Demand

When consumers are not price-sensitive, resulting in consumers bearing most of the tax burden.

Deadweight Loss

Taxation can reduce total surplus and discourage mutually beneficial transactions.

Derived Demand for Labor

The demand for labor depends on the demand for the product that labor produces.

Marginal Product

The additional output produced by hiring one more worker.

Law of Diminishing Returns

As more units of a variable resource (labor) are added to a fixed resource (capital), marginal product eventually falls.

Monopsony

A labor market with only one employer, where the firm is a wage maker.

Labor Unions

Organizations that increase wages, benefits, and working conditions for workers.

Minimum Wage

A legally mandated wage floor that may cause unemployment if set above equilibrium.

Wage Takers

In perfect competition , firms are…

Increasing Returns

Specialization , MP rises, ALWAYS hire workers

Diminishing Returns

MP is positive but falling, Firms hire workers depending on wage and price of output

Negative Returns

MP is negative, TOO many workers, NOT hire workers

MRP>MRC

Hire worker

MRP=MRC

Profit maximized

MRP<MRC

Do NOT hire worker

When wages increase

Quantity of labor decreases

When wages increase

Quantity of labor decreases

Price makers

In Imperfectly Competitive Markets, firms are…

labor demand is less elastic

In Imperfectly Competitive Markets

Exclusive Unions

Increase wages through occupational liscensing

Inclusive Unions

May cause unemployment if wage is above equilibrium