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Market Distribution of Income

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Market Distribution of Income

A group of friends growing up would like to be as successful as each other. Let's just say only 2 out of 4 friends are successful in life and they meet at a bar. Does this mean only 2 friends buy drinks for all 4? Indeed, if everyone is successful, they can buy 4 drinks and have spare change for chicken wings. And the two friends don't have to drop the other two off since they can all afford transportation. We're painting a picture of the market distribution of income here using a group of friends. It needs to be equal, otherwise, there won't be efficiency in the market. So, let's get right into it!

Market Distribution of Income Definition

The market distribution of income refers to the equality with which income is shared among all economic agents in society. For example, if everybody in the market has the same income, then we can say that there is a perfectly equal distribution of income in the market. On the other hand, if nobody apart from one person in the market has all the income, then there is a perfectly unequal distribution of income.

The market distribution of income refers to the equality with which income is shared among all economic agents in society.

If everybody in the market has the same income, then we can say that there is a perfectly equal distribution of income in the market.

If nobody apart from one person in the market has all the income, then there is a perfectly unequal distribution of income.

In the real world, income is not equally distributed, this is simply because some people earn more money than others. There you go! Now you know the definition of market distribution of income.

The Distribution of Income in a Market Economy

For economists to measure the distribution of income in a market economy, they use quintiles, which means they divide the market into 5 segments. The use of quintiles enables economists to measure the distribution of income relative to the total income in the market. The quintiles begin with the lowest 20%, then to the next 20% after that (which is also the lowest 40%) until the final quintile which is either the highest 20% or the lowest 80%.

The US is a market economy, therefore, people are paid based on the value the market places on their services. Let's look at the US as an example. Because there is an unequal distribution of income, there are still poor people in the country even though it is one of the richest countries in the world. Figure 1 shows the distribution of income in the US in thousands of dollars.1

Distribution of income in the USA StudySmarterFigure 1. Distribution of Income in the USA, StudySmarter Original. Source: United States Census Bureau1

A perfectly equal distribution of income would have shown five bars with equal increments.

The distribution of income is visualized using the Lorenz curve. It shows you how unequal the market distribution of income is as you compare it to the equality line. The larger the space between the Lorenz curve and the equality line, the more unequal the distribution of income. Look at Figure 2.

The Lorenz curve is the graphical representation of the market distribution of income.

market distribution of income Lorenz curve studysmarterFigure 2. Market Distribution of Income: Lorenz curve, StudySmarter Original. Source: United States Census Bureau1

Economists have an easy way of indicating the distribution of income in any given market. This is known as the economic inequality index or the Gini coefficient. This represents a summary of the income distribution in the market. This can be seen as the space between the Lorenz curve and the equality line. The index ranges from 0 to 1, with 0 representing perfect income equality and 1 representing perfect income inequality.

The Gini coefficient is also known as the Gini index, the income inequality index, or the economic inequality index.

Factors That Affect Market Distribution of Income

So, what are the factors that affect the market distribution of income? Well, anything that makes somebody take less income than somebody else.

Here are some of the factors that affect the market distribution of income:

  1. Productivity of workers - In some cases, workers get paid according to their level of productivity. Therefore, two workers in the same company can earn different incomes if one of them is more productive than the other.
  2. Experience or human capital - In the real world, experience is very important. Therefore, an experienced worker can have a higher starting salary compared to an inexperienced worker.
  3. Differences in tax structures - A tax structure such as regressive tax can result in lower-income earners paying more taxes than higher-income earners, making them progressively poorer.
  4. Social capital (celebrities) - In the real world, popularity can be profitable sometimes. Therefore, a celebrity can earn more by giving a speech when compared to another less known individual.
  5. Inheritance - If an individual inherits a big business, they automatically begin to earn more than many others.
  6. Bargaining power - This can be best explained using labor unions. Labor unions are formed by workers in the same profession so they can control the supply of labor and negotiate higher wages. Therefore, some professions may have a higher income compared to others.
  7. Discrimination - Things are rarely equal in the real world. Therefore, people may receive different incomes due to discrimination (racial, gender-based, social status, etc.).

Remember that while we would want income to be perfectly equally distributed, people have different capabilities, so an imperfectly equal distribution of income (or even an unequal distribution of income) is not exactly unfair depending on where you're viewing things from.

Market Distribution of Income Examples

Table 1 below shows the distribution of income in the USA for 2018.

QuintileIncome ($000)

1

3.1
28.3
314.1
422.6
552.0

Table 1. USA Income Distribution - StudySmarter2

Figure 3 shows the distribution in a pie graph.2

Market Distribution of Income.USA Incone disrtribution.StudySmarterFigure 3. USA Income Distribution - StudySmarter Original. United States Census Bureau2

Great! We made it to the end! You should check out our article on Economic Inequality to become an expert in this income distribution stuff.

Market Distribution of Income - Key takeaways

  • The market distribution of income refers to the equality with which income is shared among all economic agents in society.
  • If everybody in the market has the same income, then we can say that there is a perfectly equal distribution of income in the market.
  • If nobody apart from one person in the market has all the income, then there is a perfectly unequal distribution of income.
  • The distribution of income is visualized using the Lorenz curve.
  • Factors that affect the market distribution of income include the productivity of workers, experience or human capital, differences in tax structures, social capital (celebrities), inheritance, bargaining power, and discrimination.

References

  1. United States Census Bureau, Income and Poverty in the United States, 2019, https://www.census.gov/data/tables/2020/demo/income-poverty/p60-270.html
  2. United States Census Bureau, Income and Poverty in the United States, 2018, https://www.census.gov/data/tables/2019/demo/income-poverty/p60-266.html

Frequently Asked Questions about Market Distribution of Income

The market distribution of income refers to the equality with which income is shared among all economic agents in society.

Yes, a free market economy produces an unequal distribution of income.

The factors that that affect the market distribution of income include the productivity of workers, experience or human capital, differences in tax structures, social capital (celebrities), inheritance, bargaining power, and discrimination. 

People are paid based on the value the market places on their services.

Equal and unequal distribution of income.

Final Market Distribution of Income Quiz

Question

Define market distribution of income.

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Answer

The market distribution of income refers to the equality with which income is shared among all economic agents in society. 

Show question

Question

What is a perfectly equal distribution of income?

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Answer

If everybody in the market has the same income, then we can say that there is a perfectly equal distribution of income in the market. 

Show question

Question

What is a perfectly unequal distribution of income?

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Answer

If nobody apart from one person in the market has all the income, then there is a perfectly unequal distribution of income. 

Show question

Question

What is the Lorenz curve?

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Answer

The Lorenz curve is the graphical representation of the market distribution of income. 

Show question

Question

The productivity of workers is a factor that affects the market distribution of income.

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Answer

True

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Question

Discrimination is not a factor that affects the market distribution of income. 

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Answer

False

Show question

Question

Experience or human capital is a factor that affects the market distribution of income.  


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Answer

True

Show question

Question

The Gini coeffieict can be seen as the space between the Lorenz curve and the equality line.


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Answer

True

Show question

Question

The first quintile is 40% of total income.

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Answer

False

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The last quintile is the lowest 80%.

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True

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The last quintile is the highest 20%.

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True

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Question

The Lorenz curve indicates when the distribution of income is unequal.

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Answer

True

Show question

Question

Inheritance is not factor that affects the market distribution of income.

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Answer

False

Show question

Question

Differences in tax structures is a factor that affects the market distribution of income.  


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Answer

True

Show question

Question

Higher bargaining power can give some professions a higher income.

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Answer

True

Show question

Question

If everybody in the market has the same income, then we can say that there is ... distribution of income in the market.


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Answer

perfectly equal

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Question

Which of the following is not true for the quintiles?

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Answer

The use of quintiles enables economists to measure the distribution of income relative to the total income in the market. 

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Question

What is the lowest quintile

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Answer

Lowest 20%

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Question

Which of the following is not true for the Lorenz curve?

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Answer

The distribution of income is visualized using the Lorenz curve.


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Which economic term is used to define the graphical representation of the market distribution of income?

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Answer

Lorenz curve

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Question

Fill the blanks:

A tax structure such as regressive tax can result in lower-income earners paying ... taxes than higher-income earners, making them progressively ....


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Answer

more/poorer

Show question

Question

Fill the blanks:


The Gini coefficient represents a summary of the income distribution in the market. The index ranges from 0 to 1, with ... representing perfect income ... and ... representing perfect income ...

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Answer

0/equality/1/inequality

Show question

Question

What is the Gini coefficient?

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Answer

The Gini coefficient represents a summary of the income distribution in the market. This can be seen as the space between the Lorenz curve and the equality line.

Show question

Question

What does it mean that the Gini coefficient is 0?

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Answer

perfect income equality

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Question

What does it mean that the Gini coefficient is 1?

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Answer

 perfect income inequality

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Question

Explain the factor of Productivity of workers that affects the market distribution of income.

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Answer

Productivity of workers - In some cases, workers get paid according to their level of productivity. Therefore, two workers in the same company can earn different incomes if one of them is more productive than the other.

Show question

Question

Explain how the differences in tax structures affect the market distribution of income.

Show answer

Answer

Differences in tax structures - A tax structure such as regressive tax can result in lower-income earners paying more taxes than higher-income earners, making them progressively poorer.

Show question

Question

Explain how Bargaining power affects the market distribution of income.

Show answer

Answer

Bargaining power - This can be best explained using labor unions. Labor unions are formed by workers in the same profession so they can control the supply of labor and negotiate higher wages. Therefore, some professions may have a higher income compared to others.

Show question

Question

If nobody apart from one person in the market has all the income, then there is ...


Show answer

Answer

a perfectly unequal distribution of income.

Show question

Question

Give examples of the factors that affect the market distribution of income.

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Answer

Factors that affect the market distribution of income include the productivity of workers, experience or human capital, differences in tax structures, social capital (celebrities), inheritance, bargaining power, and discrimination.


Show question

Question

Why do economists use quintiles?

Show answer

Answer

For economists to measure the distribution of income in a market economy, they use quintiles, which means they divide the market into 5 segments. The use of quintiles enables economists to measure the distribution of income relative to the total income in the market.

Show question

Question

Explain the quintiles.

Show answer

Answer

The quintiles begin with the lowest 20%, then to the next 20% after that (which is also the lowest 40%) until the final quintile which is either the highest 20% or the lowest 80%.

Show question

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