chapter 9 economic question answer
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cm09_incomeInequality_PerfectComp.pptxMicroeconomics
Monday, July 8, 2019
CM09
Outline
Distribution of Income
Measuring Income Inequality
Poverty
Introduction to Market Structures
Theory of Perfect Competition
The Distribution of Income and Poverty
Understanding Distributions (data)
Fall 2018 Microeconomic Grades on Exam 1
Population = 91
Total Points = 7352
Average = 7352 / 91 = 80.8%
Quartiles
First Quartile: bottom 25%...
Second Quartile: next 25%...
Third Quartile: next 25%...
Fourth Quartile: top 25%...
: 48 to 76
: 76 to 80
: 80 to 88
: 88 to 100
Grade Distribution (box plot)
Fall 2018 Microeconomic Grades on Exam 1
Quintiles
First Quintile: bottom 20%
Second Quintile: next 20%
Third Quintile: next 20%
Fourth Quintile: next 20%
Fifth Quintile: top 20%
Quintiles of Grades
First Quintile (bottom fifth). 20%
Second Quintile (2nd fifth)… 20%
Third Quintile (3rd fifth)… 20%
Fourth Quintile (4th fifth)… 20%
Fifth Quintile (top fifth)… 20%
Quintiles of Grades
First Quintile (bottom fifth): 48 to 72
Second Quintile (2nd fifth): 72 to 80
Third Quintile (3rd fifth): 80 to 84
Fourth Quintile (4th fifth): 84 to 92
Fifth Quintile (top fifth): 92 to 100
Grade Distribution (Histogram)
Inequalities?
Components of Income (Census categories)
Earned Income
Wages, Salaries, and Proprietor’s Income
Property Income
Returns to assets, capital, and land
Transfer Payments
Social security, cash welfare, food stamps, etc.
Components of Income (2017 data)
Median Income, 2017
ALL HOUSEHOLDS: $61,372
By Region
Northeast $66,450
Midwest $61,136
South $55,709 (-9.2%)
West $67,517
Median Income by Age Group, 2017
Median Income by Selected Characteristics
Trend Analysis: Female to Male Parity in 2038?
Median Income by Year, Georgia
Income Inequality
The Lorenz Curve and Gini Coefficient
Perfect Income EQUALITY (1 of 2)
Example:
5 groups
Total income (all groups): $135,000
Perfect Income EQUALITY (2 of 2)
Cumulative Percentage
Perfect Income Equality
Lorenz Curve
Developed by Max Lorenz (1905)
A graphical representation of cumulative distribution of income plotted against the cumulative percentage of the corresponding population group (ranked in increasing size of share).
Perfect Income Equality
Not Quite So Perfect…
Income INEQUALITY
Gini Coefficient
Quantitative measure of income equality
Defined by area under the 45-degree line and the Lorenz Curve
0 = perfect income equality
1 = perfect income inequality
Gini Coefficient
0 = Perfect Income Equality
1 = Perfect Income Inequality
Perfect Income Equality
Gini Coefficient = 0
Less perfect…
Gini Coefficient
= 0.106
Income Inequality
Gini Coefficient
= 0.661
Measuring Income Inequality in the United States
Metric: Household Income
Year: 2017
Cumulative Income by Quintile, USA 2017
Lorenz Curve US Income 2017
Gini Coefficient Equation
Note: this equation works only for data in quintiles (i = 1 to 5)
Gini Coefficient Calculator
http://shlegeris.com/gini
Gini Coefficient, US 2017 Median Income
Equation: 0.482
Calculator…
Foster, J. 1983. An Axiomatic Characterization of the Theil Measure of Income Inequality. J. Econ. Theory 31:105-121. URL http://www.ophi.org.uk/wp-content/uploads/ssFoster-1983.pdf
Sources of Income Inequality
Innate Abilities and Attributes
Intelligence
Creativity
Appearance
Connections
Work and Leisure Tradeoff
Risk Aversion
Luck
Wage Discrimination
Poverty
Measurements and Statistics
Poverty
The Census Bureau determines poverty status by using an official poverty measure (OPM) that compares pre-tax cash income against a threshold that is set at three times the cost of a minimum food diet in 1963 and adjusted for family size.
INCOME
THRESHHOLD
FAMILY SIZE
Poverty
Based solely on money incomes
Does not include in-kind benefits
Not adjusted for unreported income
Implies poverty figures are overestimated
Not adjusted for regional differences in cost-of-living
Implies over and underestimates
Not everyone is counted
Difficult to count homeless underestimate
Poverty Thresholds: 2017
Percent of Population in Poverty
SPM = Supplemental Poverty Measure
Microeconomics
Perfect Competition
Theory and SR Equilibria
Common Among All Firms
THREE QUESTIONS
How many units of the good should the firm produce?
How much of the resources used to produce the good should it buy?
What price should the firm charge for what it produces and sells?
MARKET STRUCTURE
The setting in which a firm operates.
Characteristics influence pricing and output decisions
Types of Market Structures
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Theory of Perfect Competition
ASSUMPTIONS
There are many sellers and many buyers
Firms produce and sell homogeneous products
Perfect information
No barriers to entry
Theory of Perfect Competition
ASSUMPTION #1
There are many sellers and many buyers
Individual firms have negligible influence on market supply
Individual consumers have negligible influence on market demand
Theory of Perfect Competition
Assumption #2
Firms produce and sell homogeneous products
Each firm produces a good that is essentially the same as other firms.
Products are indistinguishable from each other.
Assumption #2
Firms produce and sell homogeneous products
Each firm produces a good that is essentially the same as other firms.
Products are indistinguishable from each other.
Theory of Perfect Competition
ASSUMPTION #3
Perfect information
No information asymmetry
Buyers and sellers have all relevant info: prices, quality, source of supplies
Theory of Perfect Competition
ASSUMPTION #4
No barriers to entry
Buyers and sellers are free to enter and exit markets at will.
Low or no startup costs
Buyers can find other markets that sell same good.
NO GOVERNMETAL LICENSING
NO PATENTS OR PROPRIETARY INFORMATION
NO ASSET SPECIFICITY
NO INTERNAL ECONOMIES OF SCALE
Theory of Perfect Competition
ASSUMPTIONS
There are many sellers and many buyers
Each is small enough to have no influence on price
Firms produce and sell homogeneous products
Products are indistinguishable from each other (e.g., corn)
Perfect information
Buyers and sellers have all relevant info: prices, quality, source of supplies
No barriers to entry
Firms are free to enter and exit markets at will
Firms are “Price Takers”
Firm’s supply of good is small relative to market (Assumption #1)
Firm sells homogeneous product (Assumption #2)
Sellers are unable to control the price of its product
Sellers “take” the price determined in the market
Sellers can adjust output as needed, but it has no effect on prices.
Determinants of demand elasticity
Remember the four determinants of demand elasticity?
?
?
?
?
Determinants of demand elasticity
Luxury versus Necessity
Long Term versus Short Term
Large Budget Share versus Small Budget Share
More Substitutes versus Few Substitutes
More Substitutes More Elastic Demand
The more substitutes a good has, the more elastic is demand.
In the perfectly competitive market setting:
There are very many substitutes, so
Demand is very elastic…in fact: perfectly elastic
Perfectly Elastic Demand Horizontal Demand Curve
The demand curve is a horizontal line
FOR ANY SINGLE FIRM
YET MARKET DEMAND IS STILL DOWNWARD SLOPING…
Market Demand and Firm Demand
Total and Marginal Revenue
Total Revenue is equal to the units sold, times the price per unit.
Marginal Revenue is the additional revenue that results from selling additional output.
Demand curve is perfectly elastic
P = MR
Demand Curve = MR Curve
Demand is perfectly elastic
Price = Marginal Revenue
Demand Curve is the Marginal Revenue Curve
Perfectly Competitive Firm
Price is set by market
Demand is perfectly elastic
How much to produce?
How much to produce
Firms want to maximize their profits….
Profit Maximization Function (HARD)
Profit Maximization Rule
PRODUCE A QUANTITY SUCH THAT:
MR = MC
Profit Maximization Rule
Determines the Quantity that a firm produces
PROFIT MAX RULE
Applies to all firms
Produce the quantity of output at which marginal revenue is equal to marginal cost.
PERFECT COMPETITION
Perfect Competition
P = MR
Profit Maximization
MR = MC
THEREFORE: P = MC
Summary of Perfect Competition
ASSUMPTIONS
There are many sellers and many buyers
Firms produce and sell homogeneous products
Perfect information
No barriers to entry
RESULTS
Firms are price takers
Firm demand is perfectly elastic
P = MR
Profit Maximization Rule
MR = MC
For perfectly elastic firms that maximize profit/minimize cost:
P = MC
Summary
Distribution of Income
Measuring Income Inequality
Poverty
Introduction to Market Structures
Theory of Perfect Competition
Share
Cumulative
Bottom Fifth
3.1
3.1
2nd Fifth
8.2
11.3
3rd Fifth
14.3
25.6
4th Fifth
22.9
48.5
Top Fifth
51.5
100.0
