| Front | Back | | --- | --- | | What is the distinction between equity and equality in the context of household income? |

Equity refers to fairness or justice in income distribution (reducing extreme disparities).
Equality refers to everyone receiving the exact same income.

| | In economic policy, equity refers to fairness or justice, whereas equality means everyone receives the exact same income. | In economic policy, equity refers to fairness or justice, whereas equality means everyone receives the exact same income. | | In a pure free market, household income depends entirely on factor ownership. Predict the effect on income distribution if a small elite owns most of the capital and land. |

Income distribution becomes highly unequal.
The elite earn high rent, interest, and profits, while workers only earn wages, widening the gap.

| | Why does the unequal distribution of land, capital, and entrepreneurship lead to income disparities in a free market? |

Income is determined by the value and quantity of resources owned.
While labor is widely owned, high-value resources (land/capital) are concentrated, leading to higher incomes (rent, interest, profit) for the owners.

| | High-income-earning resources (like advanced capital or higher education) require significant initial financial capital. Predict how this barrier affects long-term income inequality. |

It perpetuates or widens inequality.
Low-income individuals cannot afford the initial investment, limiting their future income-earning potential.

| | How does the free market allocate resources to individuals who cannot participate in resource markets (e.g., the severely disabled or elderly)? |

It allocates them zero or near-zero income.
Because they have no factor services to sell in the resource market.

| | Why does wealth inequality tend to be more extreme than income inequality over time in a free market? |

High-income earners can save and invest to accumulate wealth (assets).
Low-income earners must spend all income on basic needs, preventing wealth accumulation.

| | While income is a flow of earnings over time, wealth is a stock of assets that is typically distributed more::more/less unequally in a free market. | While income is a flow of earnings over time, wealth is a stock of assets that is typically distributed more::more/less unequally in a free market. | |

Based on the circular flow of income model, how does unequal resource ownership translate into unequal purchasing power in the product market?

Unequal resources yield unequal income (wages, rent, interest, profit) in resource markets.
This unequal income directly determines households' ability to purchase goods in product markets.

| |

Identify the four payments (factor incomes) that flow from firms to households in the resource market.

Wages (for labor)
Rent (for land)
Interest (for capital)
Profits (for entrepreneurship)

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In the circular flow model, what is the economic consequence for a household that cannot supply any factors of production to the resource market?

| They receive no factor income, meaning they cannot make expenditures in the product market to meet basic needs. | | In the circular flow of income, the value of national output is equivalent to the total income earned from production, which is also equivalent to the total expenditures spent on purchasing that output. | In the circular flow of income, the value of national output is equivalent to the total income earned from production, which is also equivalent to the total expenditures spent on purchasing that output. | | A government decides to completely eliminate all intervention (taxes, transfers) in a market economy. Predict the long-term effect on (a) allocative efficiency and (b) equity. |

(a) Allocative efficiency may increase (market forces operate freely).
(b) Equity will decrease (extreme income and wealth disparities will widen).

| | Suppose a technological shift suddenly doubles the demand for highly skilled software engineers while halving the demand for manual labor. Predict the effect on income inequality in a free market. |

Inequality increases.
Wages for skilled engineers rise due to high demand, while wages for manual laborers fall, widening the income gap.

| | Why is the free market's inability to achieve equity considered a "market failure" by many modern societies? |

The market allocates goods based on ability to pay (demand), not need.
This leaves some individuals unable to access basic necessities (food, healthcare), which society deems unfair.

| | How does ownership of "entrepreneurship" as a factor of production contribute to extreme income disparities compared to ownership of "labor"? |

Labor is limited by human time and has a relatively stable wage rate.
Entrepreneurship can yield uncapped profits if successful, leading to massive income concentration.

| | In a free market, resources are allocated by the forces of supply and demand, with minimal government intervention. | In a free market, resources are allocated by the forces of supply and demand, with minimal government intervention. | |

| Households | |

| Factors of production | |

| National expenditure | |

| (wages, rent, interest, profits) | |

| National output | |

| National income |

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.12.1 the Market’s Inability to Achieve Equity Flashcards

Flashcards for 2.12.1 The Market’s Inability to Achieve Equity

Flashcards for 2.12.1 The Market’s Inability to Achieve Equity - IB

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics