Equity in the Distribution of

Income and Wealth

Unit 6 - Lesson 13
Learning outcomes:
● Define the terms in orange bold in section 6.4 (AO1)
● Explain the free market results in the unequal distribution of income and
wealth. (AO2)
● Draw a circular flow diagram to show free markets give rise to income
inequalities. (AO4)
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

Equity:
● Fair and just.
Equality:
● Everyone receives the same amount.
Equity and Equality are different.
Income equality means that everyone in society receives equal amounts of
the resources - land, labor, capital and entrepreneurship.
Equity in most countries is seen as the reduction in income inequality.
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

It is widely believed that the free market

creates income inequality.
How much income (wages) a household
receives from their work (labor) depends
on how much they can buy in the
product market for final goods and
services.
Output and income distribution in an
economy depends on quality and how
many resources that households own
and able to sell in the resource market.
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

The problem that arises with income distribution is:

● Ownership of the resources - land, labor, capital and entrepreneurship - is
unequal.
● Prices of the resources vary greatly.
For example, most households have labor resources that they provide to the
resource market yet some households receive a higher wage due to specialized
skills and education.
Others with lower education and smaller skill set receive a smaller income
(wage).
Sometimes this lower wage does not allow the household to cover their basic
needs for themselves or their families.
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

In addition to the unequal ownership and differences in values of the resources

owned there are people who lack the skills firms desire, old, sick or needs that
prevent them from working.

Resources:

Labor - unequal distribution because of varying degrees of education and skills

between households making wages unequal.

Land and Capital - highly unequal distribution as market factors contribute to the
price of these resources therefore the rent and interest received by households
will vary greatly.
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

Because of inequality in the distribution of

resources, the free market cannot assure
that every household will be able to meet
their basic needs.
Many consider this to be a disadvantage
of the free market, and the right of
individuals to meet their basic needs is a
common belief of many individuals around
the world.
Governments intervene in the free market
to redistribute income and resources to
ensure a more socially desirable outcome.
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

Inequalities in Wealth
Inequalities in income arise from the
unequal distribution of resources.

Wealth: money, or things of value that

households own.

● Stocks and bonds

● Jewellery
● Real estate
● Art collections
Explain the free market results in the unequal distribution of income and
wealth. (AO2)

Relationship between income and wealth

● Income gives individuals the ability to save. This savings can be used to
create wealth.
● The amount of income you earn does not necessarily mean more wealth.
○ If a high income earners spends all their money and does not save then
they will not create wealth.

The higher the income the greater the possibility for saving and creating
wealth. Therefore just as the free market results in income inequality it also
results in wealth inequality.