fv5 - inequality

AP Microeconomics Unit 6 – Market Failure and the Role of Government: Topic 6.5 Inequality

Introduction (Page 1)

• Final Section of AP Microeconomics

  • This unit is small but crucial for understanding market failures.

  • Focus on how free markets can lead to economic inequality.

Types of Inequality (Page 1)

• Two Main Types of Economic Inequality

  • Income Inequality

    • Distribution of annual earnings.

  • Wealth Inequality

    • Distribution of assets.

• Sources of Inequality

  • Abilities and human capital.

  • Utility maximization.

  • Supply and demand dynamics.

  • Market structures (perfect competition, monopolies).

  • Game theory.

  • Labor markets.

  • Externalities.

  • Social capital and inheritance.

  • Discrimination effects.

  • Access to financial markets and mobility.

  • Bargaining power within economic and social units.

The Lorenz Curve (Page 2)

• Graphical Representation of Income Inequality

  • Illustrates actual income distribution in society.

  • Perfect equality is represented as 0, while perfect inequality is 1.

• Gini Coefficient

  • A numerical measurement of income inequality.

  • Calculated as Gini Coefficient = A / (A + B).

  • Higher values indicate greater inequality.

  • World average Gini Coefficient ranges from 0.61 to 0.68.

Types of Taxes (Page 3-4)

• Progressive Taxes

  • Higher percentage of income taxed from high-income groups.

  • Example: Federal Income Tax System with tax brackets.

• Regressive Taxes

  • Higher burden on low-income groups despite the same tax rate.

  • Example: Sales tax.

• Proportional Taxes

  • Same percentage of income taken from all income groups.

  • Example: Flat tax system.

• Impact of Tax Structures on Inequality

  • Progressive taxes can help reduce income inequality.

  • Regressive taxes can exacerbate economic disparities.

Key Terms to Review (Page 5-6)

• Externalities

  • Unintended side effects of economic activities affecting others.

• Game Theory

  • Analyzes strategic interactions among decision-makers.

• Gini Coefficient

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

• Inequality

  • Unequal distribution of resources, wealth, or opportunities.

• Labor Markets

  • Arena where employers seek workers and individuals offer labor.

• Lorenz Curve

  • Graphical tool for visualizing income or wealth distribution.

• Monopolies

  • Market structures dominated by a single seller, leading to higher prices and reduced competition.

• Perfect Competition

  • Market structure with many small firms, leading to optimal resource allocation.

• Regressive Taxes

  • Tax structure that disproportionately affects low-income earners.

• Supply and Demand

  • Fundamental economic model determining market equilibrium.

• Utility Maximization

  • Process of consumers allocating resources for maximum satisfaction.

Conclusion

• Understanding inequality is essential for recognizing market failures and the role of government in