Chapter 16 Notes

Microeconomics Chapter 16 Ten Things to Know from Chapter 16: What are the three basic sources of households? economic income? Roughly what fractions of total income come from each source in the U.S.? Wages or salaries received in exchange for labor 64% From property ? capital, land, etc. 22% From government 14% What determines people?s wage and salary income? What roles do skills, human capital, compensating differentials play in this determination? All factors of production (including labor) are paid a return equal to their marginal revenue product ? the market value of what they produce at the margin. Rewards of a skill that is in limited supply depend on the demand for that skill. Human capital: the stock of knowledge, skills, and talents that people possess; it can be inborn or acquired through education and training Compensating differentials: differences in wages that result from differences in working conditions. Risky jobs usually pay higher wages; highly desirable jobs usually pay lower wages What are transfer payments? What are the major programs that provide transfer payments in the U.S.? Transfer payments: payments by government to people who do not supply goods or services in exchange. Examples: Social Security programs Unemployment compensation Welfare payments Food stamps Medicaid and Medicare How are the components of economic income distributed across the different income classes of the population? See Figure 16.1. The top 5th has over half and it decreases as income decreases How has the distribution of money income varied over the last 50 years? See Table 16.2. The income distribution has remained mostly stable, but has moved slightly towards having the 5th having more and the bottom 4/5 losing ground How does the distribution of money income vary across households by race? See Table 16.3. White households have the most people with higher incomes, while few of other races do. The other races are the opposite ? the lower 4/5 has most of the income and the top 5th doesn?t have the most How does the U.S. government define poverty? What groups in the U.S. have the highest incidence of poverty? See Table 16.4. Poverty is the condition of people who have very low incomes Poverty Line: the officially established income level that distinguishes the poor from the non-poor. It is set at three times the cost of the Department of Agriculture?s minimum food budget. African Americans and Female households with no husband present What determines people?s property income? How is wealth distributed across the population? See Table 16.5. The amount of property income that a household earns depends on 1: how much property it owns and 2: what kinds of assets it owns. Such income generally takes the form of profits, interest, dividends, and rents The top ten percent has almost 70% of the wealth and the bottom 80% has 18.5% What are the main arguments in favor of income redistribution? What are the main arguments against redistribution of income? For: That a society as wealthy as the U.S. has a moral obligation to provide all its members with the necessities of life Punish innocent children? Elderly would have to survive exclusively on savings to survive ? bad luck not fair? Utilitarian justice: a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person Rawisian Justice: income distribution is necessary to maximize the well-being of the worst-off member of society Against: They believe that the market, when left to operate on its own, is fair ?one is entitled to the fruits of his own efforts? That it does not work Taxation and transfer programs interfere with the basic incentives provided by the market ? reduces incentives to work What are the major means by which income is redistributed in the U.S.? Who is eligible to receive benefits? What do they provide to recipients? Taxes finance the programs Social Security System ? elderly benefits Welfare ? families with dependent children whose incomes and assets fall below a very low level, the very poor regardless if they have children Unemployment compensation ? cash benefits for a certain amount of time for those who are laid-off Medicaid and Medicare ? health and hospitalization benefits to people with low incomes and to the aged and their survivors and disabled, respectively Food stamps: vouchers that can be used to buy food at grocery stores ? have a face value higher than their cost