1. Chapter 15: Income Distribution
AP Microeconomics
Chapter 15:
Income Distribution
Warm Up: Analyze the salary sheet and answer the questions on the back.

2. What People Earn
Why do some people earn billions of dollars while others earn barely thousands?
What do the haves have over the have nots?
How does government help the have nots?

3. Income Distribution Government Household Income
Wages & Salaries Earned
Property & Capital Investments
(Portfolio Investments)
Government

4. Distribution of Income
{Quintiles – fifths}
Economists rank all households from top to bottom and then divide them evenly into fifths (quintiles)
Bill Gates is #1, Warren Buffet is #2, etc.

5. 6% 6% 9.1% 15.1% 14.7% 29.8% 23.6% 53.4% 46.6% 100% Households Income
Cumulative
Bottom Quintile (lowest 0-20% of population)
Second Quint
Third Quint
Fourth Quint
Highest Quint 6% 6%
9.1%
15.1%
14.7%
29.8%
23.6%
53.4%
46.6%
100%
The top 1% of the population = 10% of nation’s income

6. The Lorenz Curve
GRAPH:
The graph of income distribution with cumulative percentages of families.
It compares current income distribution with evenly distributed money {socialism}.
What would a line representing a perfectly even distribution of wealth look like on this graph?
Perfect Equality % OF
INCOME
Income Gap
Lorenz Curve
% OF HOUSEHOLDS

7. What makes the haves stand out!
Haves vs. Have Nots
Think to the super wealthy in our country, or even the faces on our warm up sheet…what do those people have that others do not?
Education
Family Wealth
Talent/Skill
Power (monopoly or political)
Luck
Poverty Line:
The officially established income level that distinguishes the poor from the nonpoor.
Family of 4: $21,200
What makes the haves stand out!

8. Redistribution of Income ~ Economic Stablilzers
Progressive Taxes:
Those with higher incomes pay a higher percentage of their income in taxes
Avoid Regressive Taxes: taxes that affect the poor more than the rich (based on the g&s’ % of income)
Placing high taxes on Jaguars and Diamonds are not regressive because these items are not purchased by low income households, it is an easy way for government to increase revenue without really hurting the economically disadvantaged.

9. Transfer Payments
Payments that the government gives to individuals for which they expect nothing in return.
Ex)
Welfare -FoodStamps
Unemployment Compensation
Social Security -W.I.C.
Medicaid & Medicare -Public Housing

10. Practice Questions
What could the government do to most effectively avoid a free rider problem?
a. Enact stricter antitrust legislation
b. Provide more complete information about the relevant goods
c. Supply public goods using tax dollars
d. Tax those creative negative externalities
e. Subsidize those creating positive externalities.

11. Practice Question
Since people with relatively low incomes spend a larger percentage of their income on food than people with relatively high incomes, a sales tax on food would fall into which category of taxes?
Progressive
Proportional
Regressive
Neutral
Flat
Income Tax is a Progressive tax example
Sales Tax is a flat tax example