Why It Matters: Income Distribution

Why assess how resource markets/factors of production affect society’s distribution of income?

We have spent a great deal of time exploring product markets, that is, markets for goods and services. It’s now time to look at the other side of the production process, namely, the input side. This is usually fairly interesting to students as it explains the sources of peoples’ incomes. The U.S. is largely a market economy, where income is derived from ownership of resources. Owners of resources (or inputs) like labor, land and capital are paid what the market says the resources are worth. Of course, there is more than one market for labor and other inputs. For example, the market for new college graduates in economics is different from the market for Ph.D. economists, and the value markets place on new college graduates versus economists reflects that difference. But the principles of supply and demand still apply for all inputs, as we will see in this module.

 

Four photographs of a keyboard with the "shift" key replaced with words related to money. The shift key instead says "income," "profit," "earnings," and "interest."

Income, Earnings, Profit, Interest by GotCredit, CC-BY.

 

As you work through this module, consider the following questions:

  • What factors determine how much a person gets paid for their labor?
  • Why do teachers and nurses get paid less than professional athletes?
  • Why do garbage men (or urban sanitation engineers) get paid significantly above minimum wage?  Is it because of the skills they possess?
  • Why do unionized workers earn more than non-union workers?
  • How much of the income differences between people is due to chance and how much is due to choices the individuals make?
  • Can poverty be eliminated or will some part of the population always be poor?
  • How well does the marginal productivity theory of income distribution explain the actual income distribution in the United States or other nations?

Some of these questions will be explicitly answered in the module; others you will have to think about.

LEARNING OUTCOMES

  • Describe the incomes earned by the factors of production (land, labor, capital, entrepreneurship) wages, interest, rents, and profit
  • Analyze how perfect/imperfect competition between buyers and sellers of factors can impact wages, interest, and rents
  • Compare the marginal productivity theory of income distribution versus real world income distribution
  • Use the Lorenz Curve to analyze the distribution of income and wealth