Chapter 8: Distribution Overview Income Distribution & Wages and Salaries Income Inequality Interest Income, Savings, Rental Income & profit Circular.

Chapter 8:Chapter 8:Chapter 8:Chapter 8:

DistributionDistribution

Overview• Income Distribution & Wages and Salaries• Income Inequality• Interest Income, Savings, Rental Income & profit• Circular Flow & Gross Domestic Product• Causes of Income Inequality• Government Programs to Reduce Poverty• Who Is Poor?• Regional Income Inequality

Income Distribution• Three basic economic questions are: “What to

produce?” “ How to produce it?” & “For whom to produce?”

• Supply and demand will answer this question in the productive resources market in the form of wages, rent, interest and profit.

Wages & Salaries• Increases in demand and decreases in supply

cause wages to be higher whereas decreases in demand and increases in supply cause wages to be lower

Demand, Supply & Wages of Plumbers in a Canadian City (fig.8.2/8.3) p. 160

D2

Shortage

Number of PlumbersNumber of Plumbers

(wag

es p

er h

our

(dol

lars

)

30

10

20

400200 300 500 600100

25

A decrease in the demand for plumbers

D2

Surplus

Number of PlumbersNumber of Plumbers

(wag

es p

er h

our

(dol

lars

)

30

10

20

400200 300 500 600100

25

15

S2

A Decrease in the Supply of PlumbersA Decrease in the Supply of Plumbers

Shortage

Number of PlumbersNumber of Plumbers

(Wag

es p

er h

our

($)

30

10

20

400200 300 500 600100

25

15

S2

An increase in the Supply of PlumbersAn increase in the Supply of Plumbers

Surplus

Number of PlumbersNumber of Plumbers

(Wag

es p

er h

our

($)

30

10

20

400200 300 500 600100

25

15

Factors Affecting Wages & Salaries

• Government regulations – minimum wage and fringe benefits

• Labour unions• Large employers• Mobility of workers• Barriers to entry – specialized

training, discrimination

Interest Income• Price paid to a lender for the use

of a sum of money over a period of time

Savings• Part of income that is not spent on

goods and services

Rental Income• Payment for the use of a resource,

specifically land

Income from Profits• What is left over after all the costs have

been paid for from the revenue earned by the business (i.e. Total Revenue – Total Costs)

• Reward to the entrepreneur for taking the risk of starting a business

• Prime motivator to start a business and run it well to satisfy the wants and needs of consumers

Circular Flow

Gross Domestic Product (GDP)

• The total value at market prices of all final goods and services produced in Canada over a period of time (usually a year)

• Expenditure approach = Consumption + Investment + Government + (Exports – Imports) or C + I + G + (X - M)

• Income approach = wages + rent + interest + profit – (depreciation + indirect taxes)

Income Inequality• Lorenz Curve is a graph that helps

illustrate the income inequality in a society by contrasting perfect equality with reality within a given economy

Causes of Income Inequality

• Natural ability• Education, training and

opportunity• Property ownership• Ability to influence

wages and salaries – labour unions and professional associations

• Discrimination – women and minorities

• Poor health or physical disability

• Region or residence – Ontario higher incomes than Newfoundland

• Luck – lottery, accident• Weeks worked• Age

Government Programs to Reduce Poverty

• Investment in human capital (i.e. education and skill training)

• Keep economy operating at a high level to provide jobs

• Safety programs to protect workers and universal health care

• Old age security pension, unemployment insurance, welfare, C.A.P.

Who is Poor?• $15, 067 (in 1992) for a family of four in a mid-

sized Canadian city according to Professor Sarlo

• House of Commons Conservative sub-committee menu of basic needs with differences in cost of living from location to location taken into consideration

• Statistics Canada Low Income Cut-Off (L.I.C.O.) spend 70% or more on three essentials (food, clothing, shelter)

• 12% of families and 30% of unattached individuals below the L.I.C.O. line

Regional Income Inequality

• Ontario, Alberta and British Columbia wealthier

• Maritimes and Quebec poorer