Why Do Incomes Differ?

Preparing to Teach HS Economics2014

Wages are determined in the factor (resource) market

Like other prices, wages are set by supply and demand

Wage

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Supply of labor is determined by the workers’ opportunity cost, as well as skills and abilities

Demand for labor is determined by the price of the product and the productivity of the worker

Quantity

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Why does LeBron James get paid more than me?

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Lesson 13, Who Decides Wage Rates?National Occupational Employment and

Wage Estimates (2012)Retail salesperson: $25,310Medical secretary: $32,670

Firefighter: $47,850Electrician: $53,030

Secondary school teacher: $57,710Police officer: $57,770

Insurance sales agent: $63,400Registered nurse: $67,930

Pharmacist: $114,950Computer and information systems manager: $129,130

Anesthesiologist: $232,830Source: http://www.bls.gov/oes/current/oes_nat.htm

Lesson 13 - Debriefing

• What is a labor market?• Who represents supply, and who represents

demand in a labor market?• What is derived demand?• How are wages linked to the prices paid for goods

and services?• How is productivity linked towages?• Why do surgeons earn higher salaries than retail

salespeople?

Income distribution can be measured by quintiles

Income distribution can be measured by a Lorenz Curve

www.worldbank.org

Many interactive graphics and videos demonstrate income and wealth inequality

The L-CurveWealth Inequality in America

Why does income distribution matter?

• Income distribution affects allocation decisions (whose utility matters?)

• Income distribution affect the achievement gap, thus social mobility

• Income distribution affects political decisions– Tax policy– Provision of public goods– Collaboration v. dissension

What is the government’s role?In a market economy, the government must:• Establish property rights• Protect borders/national defenseIn the U.S. economy, the government has additional economic roles:• Provision of public goods• Protection of common resources• Taxes/regulations/subsidies to address externalities• Consumer protection and information• Trust and anti-trust provisions• Safety net/income redistribution• Economic stability

Government in the *Circular Flow

Environmental Quality at Discount Prices, Economics and the Environment