Inequality

Question 1

What is the size distribution of income?

Answer 1

A measurement that looks at income distribution relative to levels of income received - data for each quintile of households, compares each quintile to total income of pop

Question 2

Define Lorenz curve?

Answer 2

A curve showing percentage of national income earned by a given percentage of the population

Question 3

Draw Lorenz curve

How is the Gini coefficient calculated from it?

Answer 3

Now

A/(A+B)

Question 4

What does GC=1 and GC=0 represent?

Answer 4

1 - perfect inequality

0 - perfect equality

Question 5

What is the functional distribution of income?

Answer 5

Measure of income where the % of a households total income is divided into different income sources (wages, pensions etc) and then shown in terms of each given percentage of households

Question 6

Define poverty?

Answer 6

A state in which a household’s income is too low for it to be able to buy necessary levels of food, clothing, shelter etc

Question 7

What relative poverty?

Answer 7

When someone’s income is less than 60% of the median income

Question 8

What is the poverty rate?

Answer 8

The % of households living below the poverty line

Question 9

See/learn income distribution diagram

Answer 9

Now

Question 10

Define inefficient allocation?

Answer 10

When resources CAN be reallocated to make people better off without hurting anyone

Question 11

What is a Pareto improvement?

Answer 11

The reallocation of resources to make someone better off without making anyone else worse off

Question 12

What is a Pareto efficient allocation?

Answer 12

An allocation where no Pareto improvements can be made

Question 13

3 requirements for Pareto efficiency and note?

Answer 13

1) MB = MC
2) MB of consumption of a good is equal for all consumers
3) MC is equal for every firm

Note: these conditions refer to the last units for each firms and the last unit consumer for each consumer

Question 14

Up to what point will rational consumers purchase additional units of a good?

Answer 14

If MU>=P they will buy

Question 15

PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT

1) Prove that MB = MC

Answer 15

-MB = MU
Rational consumer tf buys goods up to this point
- MC = P
Perfect comp diagram - MC=MR=P
- THEREFORE MB=MC=P

Question 16

PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT

2) prove that MB of consumption of a good is equal for all consumers

Answer 16

See diagrams

Since all consumers consume up to the point MU=P, they all get the same MB which is equal to the equilibrium price

Question 17

Define consumer surplus?

Answer 17

The difference between what consumers are willing to pay and what they actually pay

Question 18

PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT

Prove that the MC is equal for every firm?

Answer 18

Firms in PC profit maximise at P=MC(=MR)

since market price is the same in the whole industry, and P=MC, MC must be the same for every firm

See diagrams

Question 19

Define producer surplus?

Answer 19

The difference between the price firms are willing to sell a good for and the price they receive

Question 20

Important note about perfectly competitive markets and surplus?

Answer 20

In a PC market, total surplus is maximised:

MSB=MU=P=MC=MSC