B2.02.01: The Free Market and Equity

Question 1

Define Equity

Answer 1

A fair distribution of wealth in an economy

Question 2

Define Wages

Answer 2

The return for labour

Question 3

Define Wealth

Answer 3

A stock of accumulated assets that can generate income

Question 4

Define Equality

Answer 4

An equal distribution of wealth in an economy

Question 5

Define income

Answer 5

A flow of money measured over a period of time

Question 6

Define Marginal Revenue Product (MRP)

Answer 6

The marginal revenue created due to an addition of 1 unit of resource

Question 7

What is the link between income and wealth

Answer 7

Both of them are mutually reinforcing:
- This also means that if you have a relatively high income, there are higher chances of being wealth
- The same is true the other way around

Question 8

What are the 4 reasons for differentials in income and wealth?

Answer 8

• Age
• Education
• Ownership of financial assets + property
• Wage differentials

Question 9

Explain how age is a reason for differentials between income and wealth

Answer 9

• The older an individual is, the greater their earning potential is as they have gained more skills through more experience and become more productive thus, they can demand higher wages meaning their wealth accumulation can be greater too.
• Wealth accumulated over time (with higher incomes)
• As incomes increase, wealth w/ higher MRP over time increases

Question 10

Explain how education is a reason for differentials between income and wealth

Answer 10

• The greater the qualification of an individual, the greater the earning potential of that individual compared to those who don’t
• This leads to greater distribution of incomes

Question 11

Explain how ownership of financial assets + property is a reason for differentials between income and wealth

Answer 11

The stronger the individual, the more likely employers are going to provide better pension schemes

• This leads to a greater distribution of incomes
• At the same time, those who own property are going to be extremely wealthy over time as these prices increase thus, leading to a bigger divide in the distribution of wealth compared to those who can’t afford property therefore, worsening the distribution of wealth over time.
• Moreover, children, over generations, will inherit this wealth thus, worsening the distribution of wealth and, due to these assets generating income, will worsen the distribution of income.

Question 12

Explain how wage differentials are a reason for differentials between income and wealth

Answer 12

Differences in minimum wages in specific countries will lead to greater unequal distributions of income