Inequality Flashcards
What is the size distribution of income?
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
Define Lorenz curve?
A curve showing percentage of national income earned by a given percentage of the population
Draw Lorenz curve
How is the Gini coefficient calculated from it?
Now
A/(A+B)
What does GC=1 and GC=0 represent?
1 - perfect inequality
0 - perfect equality
What is the functional distribution of income?
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
Define poverty?
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
What relative poverty?
When someone’s income is less than 60% of the median income
What is the poverty rate?
The % of households living below the poverty line
See/learn income distribution diagram
Now
Define inefficient allocation?
When resources CAN be reallocated to make people better off without hurting anyone
What is a Pareto improvement?
The reallocation of resources to make someone better off without making anyone else worse off
What is a Pareto efficient allocation?
An allocation where no Pareto improvements can be made
3 requirements for Pareto efficiency and note?
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
Up to what point will rational consumers purchase additional units of a good?
If MU>=P they will buy
PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT
1) Prove that MB = MC
-MB = MU Rational consumer tf buys goods up to this point - MC = P Perfect comp diagram - MC=MR=P - THEREFORE MB=MC=P
PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT
2) prove that MB of consumption of a good is equal for all consumers
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
Define consumer surplus?
The difference between what consumers are willing to pay and what they actually pay
PROVING A PERFECTLY COMPETITIVE MARKET IS PARETO EFFICIENT
Prove that the MC is equal for every firm?
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
Define producer surplus?
The difference between the price firms are willing to sell a good for and the price they receive
Important note about perfectly competitive markets and surplus?
In a PC market, total surplus is maximised:
MSB=MU=P=MC=MSC
