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By the end of this section, you will be able to:
  • Explain the distribution of income, and analyze the sources of income inequality in a market economy
  • Measure income distribution in quintiles
  • Calculate and graph a Lorenz curve
  • Show income inequality through demand and supply diagrams

Poverty levels can be subjective based on the overall income levels of a country; typically poverty is measured based on a percentage of the median income. Income inequality, however, has to do with the distribution of that income, in terms of which group receives the most or the least income. Income inequality involves comparing those with high incomes, middle incomes, and low incomes—not just looking at those below or near the poverty line. In turn, measuring income inequality means dividing up the population into various groups and then comparing the groups, a task that can be carried out in several ways, as the next Clear It Up feature shows.

How do you separate poverty and income inequality?

Poverty can change even when inequality does not move at all. Imagine a situation in which income for everyone in the population declines by 10%. Poverty would rise, since a greater share of the population would now fall below the poverty line. However, inequality would be the same, because everyone suffered the same proportional loss. Conversely, a general rise in income levels over time would keep inequality the same, but reduce poverty.

It is also possible for income inequality to change without affecting the poverty rate. Imagine a situation in which a large number of people who already have high incomes increase their incomes by even more. Inequality would rise as a result—but the number of people below the poverty line would remain unchanged.

Why did inequality of household income increase in the United States in recent decades? Indeed, a trend toward greater income inequality has occurred in many countries around the world, although the effect has been more powerful in the U.S. economy. Economists have focused their explanations for the increasing inequality on two factors that changed more or less continually from the 1970s into the 2000s. One set of explanations focuses on the changing shape of American households; the other focuses on greater inequality of wages, what some economists call “winner take all” labor markets . We will begin with how we measure inequality, and then consider the explanations for growing inequality in the United States.

Measuring income distribution by quintiles

One common way of measuring income inequality is to rank all households by income, from lowest to highest, and then to divide all households into five groups with equal numbers of people, known as quintiles . This calculation allows for measuring the distribution of income among the five groups compared to the total. The first quintile is the lowest fifth or 20%, the second quintile is the next lowest, and so on. Income inequality can be measured by comparing what share of the total income is earned by each quintile.

Questions & Answers

what are some characteristics of monopoly market
Obeng Reply
explicit cost is seen as a total experiences in the business or the salary (wages) that a firm pay to employee.
Idagu Reply
what is price elasticity
economics is known to be the field
John Reply
what is monopoly
Peter Reply
what is taxation
why do monopoly make excess profit in both long run and short run
Adeola Reply
because monopoly have no competitor on the market and they are price makers,therefore,they can easily increase the princes and produce small quantity of goods but still consumers will still buy....
how to identify a perfect market graph
Adeola Reply
what is the investment
investment is a money u used to the business
investment is the purchase of good that are not consumed today but are used in the future to create wealth.
investment is the good that are not consumed
What is supply
 Supply represents how much the market can offer.
what is the effect of scarce resources on producers
Phindu Reply
what is economic
Charles Reply
what are the type of economic
macroeconomics,microeconomics,positive economics and negative economics
what are the factors of production
process of production
Basically factors of production are four (4) namely: 1. Entrepreneur 2. Capital 3. Labour and; 4. Land but there has been a new argument to include an addition one to the the numbers to 5 which is "Technology"
what is land as a factor of production
what is Economic
economics is how individuals bussiness and governments make the best decisions to get what they want and how these choices interact in the market
Economics as a social science, which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
Economics is a science which study human behaviour as a relationship between ends and scarce means
Economics is a social sciences which studies human behavior as a relationship between ends and scarce mean, which have alternative uses.....
how will a country's population be equal to it's labour force
Hope Reply
what is the meaning of ppf
Obeng Reply
Production Possibility Frontier
What is Economic
Governor Reply
Economics is the social science that deals with the unlimited human wants in the face of scarce (limited in supply) resources.
what is market
Gift Reply
marker is the interaction of buying and selling
market refers to the interaction of the processes of buying and selling of commodities between the buyer and the seller.
market is a place where two parties gather to facilitate exchange of goods and services.
what are some good sources of information to find trends in various Industries
how do on know that marketing is going on
what is consumption
Using revenue
What is stock market
what is inadequate supply of labour
What are the marmet function
Odirile Reply
price elasticity of demand is the degree of responsiveness of a quantity demanded to the change in price of the commodity in question.
Gladys Reply
What does elasticity mean
Elasticity means change in demand with the change in price. It is elastic if the demand changes with the price change whereas it is inelastic if the demand is not affected due to change in price
I have a question
what is the importance of learning economics?
Thelma Reply
it helps to make the correct choice
it helps firm to produce products that will bring more profit

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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