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Chapter 16 Topics
16.1 Facts About Income Inequality 16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts
Microeconomics, Chapter 16
one way to measure income inequality is to look at the percentages of families in a series of income categories
Microeconomics, Chapter 16
Under $10,000 $10,000 - $19,999 $20,000 - $29,999 $30,000 - $49,999 $50,000 - $59,999 $60,000 and over
2005 McGraw-Hill Ryerson Ltd.
Microeconomics, Chapter 16
Quintile
Lowest 20% Second 20% Third 20% Fourth 20% Highest 20%
2005 McGraw-Hill Ryerson Ltd.
the area between the diagonal (the line of perfect equality of income distribution) & the Lorenz Curve shows income inequality
Microeconomics, Chapter 16
Perfect Equality
80 60 40 20 0 0 20 40
Percent of families
2005 McGraw-Hill Ryerson Ltd.
80 60 40 20 0 0 20 40
Percent of families
2005 McGraw-Hill Ryerson Ltd.
10
80 60 40 20 0 0 20
Area between the lines shows 40 60 80 the degree of100 Percent of families income inequality
Microeconomics, Chapter 16
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Gini ratio 100 A(light blue area) A B (light blue light green)
Percent of income
80 60 40 20
B
0 20 40 60 80 100
0 Percent of families
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
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Microeconomics, Chapter 16
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80 60 40 20 0 0 20
14
government transfers have been the most important means of alleviating poverty in Canada
Microeconomics, Chapter 16
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Chapter 16 Topics
16.1 Facts About Income Inequality 16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts
Microeconomics, Chapter 16
16
Ability Education & Training Discrimination Preferences & Risks Unequal Distribution of Wealth
Market Power
Luck, Connections, & Misfortune
Microeconomics, Chapter 16
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incomes in Canada have moved up, in absolute terms the relative distribution of income is largely unchanged income inequality tends to be highest in developing nations
Microeconomics, Chapter 16
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Brazil South Africa Guatemala Mexico United States Canada France Italy Sweden 0 10 20 30 40 50 60
% of total income
Microeconomics, Chapter 16
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greater demand for highly skilled workers demographic changes international trade, immigration, & decline in unionism
Microeconomics, Chapter 16
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Chapter 16 Topics
16.1 Facts About Income Inequality
16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts
Microeconomics, Chapter 16
21
an example
Microeconomics, Chapter 16
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Anderson
Brooks
MUA
2500 Income
b
7500
MUB
Income
23
a a'
G
MUA
Income
b' b
L
MUB
Income
2500 5000
5000 7500
24
Microeconomics, Chapter 16
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Chapter 16 Topics
16.1 Facts About Income Inequality
16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.5 Welfare Policy: Goals & Conflicts
Microeconomics, Chapter 16
26
Definition of Poverty
families that spend 53% or more of their income on food, shelter & clothing are below the low income cutoff
Microeconomics, Chapter 16
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Microeconomics, Chapter 16
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many people are temporarily poor permanently poor are increasingly geographically isolated poor are politically invisible
Microeconomics, Chapter 16
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Microeconomics, Chapter 16
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Chapter 16 Topics
16.1 Facts About Income Inequality
Microeconomics, Chapter 16
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Microeconomics, Chapter 16
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common features
Microeconomics, Chapter 16
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Plan 1:
benefit-reduction rate too high: does not provide sufficient incentives to work
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
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Plan 2:
Microeconomics, Chapter 16
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Plan 2:
Plan 3:
still more$12,000 costly than minimum annual income plan 1 benefit-reduction rate 50%
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
36
Microeconomics, Chapter 16
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Chapter 16 Topics
16.1 Facts About Income Inequality
Microeconomics, Chapter 16
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Types of Discrimination
Costs of Discrimination
Microeconomics, Chapter 16
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Capital goods
X Y
Kd
D
Cd
Consumer goods
Microeconomics, Chapter 16
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Taste-for-Discrimination Model
Discrimination Coefficient Prejudice & the Market Visible MinorityWhite Wage Ratio Competition & Discrimination
Microeconomics, Chapter 16
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Figure 16-4
an increase in prejudice would decrease the demand for visible minority workers
S
$9 8 6
D1
Visible minority employment (millions)
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
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a decrease in prejudice would Figure 16-4 increase the demand for visible minority workers
S
Wage rate (dollars)
$9 8 6
D2 D1
Visible minority employment (millions)
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
43
Figure 16-4
S
Wage rate (dollars)
$9 8 6
D1
D3
44
Statistical Discrimination
Basic Idea Labour Market Example Profitable, Undesirable, but Not Malicious
Microeconomics, Chapter 16
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Microeconomics, Chapter 16
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Figure 16-5
Wage rate Wage rate Wage rate
DX
3 Quantity of labour a) Occupation X
Q
women are crowded into Occupation Z, earning a low rate of W, while men earn higher rates of M in Occupations X & Y
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
47
Figure 16-5
Wage rate Wage rate Wage rate
M B
W
DX
3 4 Quantity of labour a) Occupation X
Q
48
Figure 16-5
Wage rate Wage rate Wage rate
M B
W
DX
3 4 Quantity of labour a) Occupation X
Q
eliminating occupational segregation leads to an increase in output (grey areas minus orange area)
2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16
49
Chapter 16 Topics
16.1 Facts About Income Inequality
Microeconomics, Chapter 16
50