ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 31: Income, Poverty
and Health Care
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.
Income

Income sources
 Payment
for a factor of production
 Gifts
 Government

transfers
Distribution of Income
 The
way income is allocated among the
population
2
Income

Lorenz Curve
A
geometric representation of the distribution
of income
 A Lorenz curve that is perfectly straight
represents complete income equality
 The more bowed a Lorenz curve, the more
unequally income is distributed
3
The Lorenz Curve
Cumulative Percentage of Money Income
100
Inequality
gap
75
50
28
25
Actual money
income
distribution
45°
0
Figure 31-1
Complete
equality
25
50
75
Cumulative Percentage of Households
100
4
Income

Criticisms of the Lorenz curve

It does not include income in kind.





Income received in the form of goods and services
It does not account for the differences in size of
households or the number of wage earners
households contain.
It does not account for age differences.
It ordinarily reflects money income before taxes.
It does not measure unreported income.
5
Lorenz Curves of Income Distribution,
1929 and 2005
Cumulative Percentage of Money Income
100
80
60
2005
40
20
0
Figure 31-2
Complete
equality
1929
20
40
60
80
Cumulative Percentage of Households
100
6
Percentage Share of Money Income
for Households Before Direct Taxes
Table 31-1
7
International Example:
Income Inequality in the U.S.
Figure 31-3
8
The Distribution of Wealth
The distribution of income is not the same
thing as the distribution of wealth.
 Income is a flow variable; wealth is a
stock.
 Income can be viewed as a return on
wealth.

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Determinants of Income Differences

Age
 Age-Earnings

Cycle
The regular earnings profile of an individual
throughout his or her lifetime
•At age 18, earnings from
wages are relatively low.
•Earnings gradually rise until
they peak at about age 50.
•Earnings then fall until
retirement, when they
become zero.
10
Determinants of Income Differences




Access to education
Marginal productivity
 Talent
 Experience
 Training
 Investment in human capital
Inheritance
 10 percent of inequality traced to inheritance
Discrimination
 Employment opportunities
 Different pay for equal MRP
 Equal pay for different MRP
11
Determinants of Income
Differences

Doctrine of Comparable Worth
 The
belief that women should receive the
same wages as men if the levels of skill and
responsibility in their jobs are equivalent
12
Theories of Desired Income
Distribution

Productivity
 “To
each according to what he or she
produces.”

Equality
 “To
each exactly the same.”
13
Poverty and Attempts to Eliminate It
Mass poverty can no longer be said to be
a problem in the Western world.
 The U.S. engages in a fair amount of
income redistribution.
 There is always a need to assess whether
the programs are successful.

14
Official Number
of Poor in the United States
Figure 31-6
Source: U.S. Department of Labor
15
Poverty and Attempts to Eliminate It

Defining poverty
 Official
poverty level in 2005 for an urban
family of four was $19,000.
Adjusted annually for inflation
 Does not include transfer payments

 Official
poverty level in 2007 for a family of
four was $21,200. As a result, the percent of
the population in poverty was 12.5%.
16
International Example: The U. S.
Poverty Level Vs. Incomes Abroad
The World Bank publishes an annual
report giving the per capita incomes of
about 150 nations.
 Of these, only 26 have per capita incomes
higher than the poverty income threshold
defined for the U.S. Of course, the cost of
living is lower in such countries.

17
Poverty and Attempts to Eliminate It

Attacks on poverty: major income
maintenance programs
 Social

Security
OASDI (Old Age, Survivors, and Disability
Insurance)
90 percent of all employed persons covered
 In 2005, 45 million people received OASDI payments
averaging $875/month


Supplemental Security Income (SSI)
 Minimum
income for the aged, blind and
disabled
18
Poverty and Attempts to Eliminate It

Temporary Assistance to Needy Families
(TANF)
 5-year
limit for each person
 Must seek training and employment

Food stamps
 Government-issued
coupons that can be used
to purchase food
 In 2005, one in nine citizens received food
stamps
19
Poverty and Attempts to Eliminate It

Earned Income Tax Credit Program
 Families
with low incomes receive a
graduated benefit

With all these programs, no apparent
reduction in poverty
 1973—11
percent
 1983—15 percent
 1990—13.1 percent
 2007—12.5 percent
20
Health Care

America’s health care situation
 16
percent of U.S. real GDP is devoted to
spending on health care.
 Per capita spending on health care is greater
in the United States than anywhere else in the
world.
21
Percentage of Total National Income
Spent on Health Care in the United States
Figure 31-8
Source: U.S. Department of Commerce; U.S. Department of Health
and Human Services; Deloitte and Touch LLP; VHA, Inc.
22
Health Care

Why have health care costs risen so
much?
 The

age-health care expenditure equation
Aging population increases the demand for health
care
 New
technologies
 Third-party financing
23
Third Party versus Out-of-Pocket
Health Care Payments
Figure 31-9
Source: Health Care Financing Administration;
U.S. Department of Health and Human Services
24
Health Care

Price, quantity demanded
 Large
percent of medical services payments made by
third parties
 Price to the consumer drops and the quantity
demanded increases

Moral hazard and consumers
 An
individual with a zero deductible for medical care
may engage in a less healthful lifestyle than one who
must pay a $1,000 deductible
25
The Demand
for Health Care Services
Price
At P1 quantity
demanded is Q1.
If the price falls
to zero, quantity
demanded increases
to Q2.
P1
D
Q1
Q2
Quantity of Health Care Services per Year
Figure 31-10
26
Health Care

Moral hazard as it affects physicians and
hospitals
 Due
to third-party payments, patients do not have to
worry about the cost of operations and medical
procedures.
 Physicians and hospitals order more of them since
they are reimbursed on the basis of medical
procedures.
27
Health Care

Fully 30 percent of Medicare expenditures
are for patients in their last year of life.

Is national health insurance the answer?
40 million Americans are uninsured at some point
during the year
 National health insurance would increase the
amount of national income devoted to medical
services

28
Federal Medicare Spending
Figure 31-11
Source: Economic Report of the President;
U.S. Bureau of Labor Statistics
29
Health Care

Countering the moral hazard problem: a
Health Savings Account (HSAs)
A
tax-exempt health care account to which
individuals would pay into on a regular basis
and from which medical care expenses could
be paid
30
Issues and Applications: Should U.S. Health
Care Copy Other Nation’s Programs?




Is the rise in health care costs evidence of a crisis?
To a certain extent, residents of the U.S. choose to
spend more on health care.
In other countries, waiting lists for certain procedures
serve to dampen the amount of health care people
receive.
Recommended viewing: The movie Sicko from Michael
Moore
31
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 31: Income, Poverty
and Health Care
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.
32