# 14.4 Income inequality: measurement and causes

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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 is economics?
by this time
Emmanuel
It is a social science that analyses production,distribution and consumption of goods and services
Emmanuel
A social science that study human behavior in relationship with decision making
Jessica
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
What are the limitation and significant of macroeconomic
explain the significance of concerpt of opportunity cost in planning
what is meant by the price elasticity of demand?
What are the limitations of macroeconomic and their segnificant
Discuss the role of competition in stimulating economic growth?
competition stimulate economic growth because in such types of economy,they is no monopoly power every supplier will want to produce to meet customers choice which brings about quality production and attract invested and customers into such economy
Koka
competition creates Monopoly because of economy of scale. it's not antithesis but different side of same coin
toko
competition result in high economic growth since every firm will intend to provide quality services and products to meet customers needs and requirements unlike in Monopoly situation where a firm just provide what it want to resulting in large stock piles of unwanted products ,ie inefficiency, howev
Mark
microeconomics study part of the economy but macroeconomic study the whole economy
studying the whole economy, solving the problem of the economy and building up the economy
Olokun
micro means small while macro means large
Olokun
standard of living is the footsteps of an economy because it plays important role for country to have crucial view about their budget ,import and export
Olokun
it will be differ because economic agent will only take their views on some part of household
Olokun
can opportunity cost be zero
how many types of transportation do we have
Jacob
yes. when a customer's purchasing power is high, he may have d ability to purchase all he needs, dt makes opportunity cost zero
George
please can give more explanation on this question
OBED
what are the factors production
Labour capital entrepreneurs
Leta
Land,capital, labour,and the entrepreneur
Tantoh
I will like to know use of calculus in economics
do they use it in economics?
Pranav
I want to know if I should take calculus or statistics and probability my senior year of highschool
Yahir
yes for example in monopolistic competitive market..... TR=TC* & THIS CALCULATED BY CHANGING( DERIVATIVE LAW) MR =MC ** WILL BE THE FORMULA THAT USE.
Leta
please in which topic in economic is the question coming from.
Tantoh
from PCF in economics
Leta
why is unitary proportional to responsiveness
any tip for igcse economics exam?pls
well
The
What is a market
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
what are the variables that affect demand
Divine
price of the related goods 2 price of the given commodity 3 income of the consumer 4 taste and preference 5 expectation in the future price
John
pls the taste and preference
Nas
explain briefly
Nas
a consumer taste and preference commodity changes for a time the man becomes
John
sorry sorry
John
is when the price of a commodity becomes high and can't afford example Samsung instead of iPhone
John
consumers who have high intense for goods will purchase the goods even if the price of that commodity increases because he or she preferred that commodity.people will be prefer iphone as its price increase
Yussif
as usual bad taste of preference is when a consumer regrets from one commodity to another in terms of the price
John
thanks alot
Nas
you're welcome
John
#Preference; #Income #Test
Dereje
#price Of Commodity #Income #Taste #Preference
Dereje
#Market is The Place Where Buyers And Sellers Are Exchanging Their Goods And service. #
Dereje
difference between macro and micro economics
Lawrence
Microeconomic Study about individual consumers market But Macroeconomis Study General economic Process Such As #Aggregate Demand #Aggregate Supples #GDp= #GNp
Dereje
nice so can u run down a brife discussion on GDP
Lawrence
good
Chinex
pls can someone differentiate between the perfectly elastic, perfectly inelastic and unitary
and then again pls what are the types of elasticity, the methods of calculating it thank u
yhar
Perfectly inelastic is when the coefficient is equal to zero Unitary is when the coefficient is equal to one But am not sure if we have perfectly inelastic
John
I'm kind off confuse abt the PED, IED and co are they the types of elasticity we've
yhar
Yh the types are price elasticity cross and income elasticity of demand
John
do we've specific formulaes to calculate for each of them
yhar
yes. PED. changes in quantity demanded divided by changes in price
Vealmurugan
so pls what's the general name given to unitary, elastic n inelastic ? are the names given to the final result after doing the calculations?
yhar
P2-P1÷P1×100or Q2-Q1×Q1×100 PED
John
***tutor2u.net/economics/reference/price-elasticity-of-demand
Vealmurugan
They are elasticity coefficient
John
@John I don't get u well pls
yhar
whichone
John
P2-P1Ã·P1Ã100or Q2-Q1ÃQ1Ã100 PED @john pls tis is what m talking abt
yhar
Yh is the formula for PED
John
Pls are you having a for PED
John
thank u very
yhar
dy
Jobang
what is economics
Tayyeb
economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative use
John
is a science which study human behavior as a relationship between ends and scarce means which have alternative uses
Divine
yes this is because economic provide a body of knowledge on human economic principles under theories and these theories can be verified with real world data using science method in other words it was scientific method in arriving at solution identification of problem or basic data collection among
John
unitary ElasticWhen Elasticty =1 Perfectily Elastic When 0<1 inelastic when 0>
Dereje