Understanding Lorenz Curve, Monopsony, Perfect Competition, and Labor Market Dynamics
Lorenz Curve and Income Inequality
The Lorenz curve is used to measure income distribution inequality within a country and compare it to other countries. It relates the percentage of the total population to their share of total income, starting with the poorest. To construct the curve, individuals or families are ranked by income level, from poorest to richest.
Income is grouped into segments, and each group’s income is expressed as a percentage of GDP. For example, the poorest 10% of the population receives 2% of total income, and the next 10% receives 4.5%. Adding these together, the poorest 20% receives 6.5% of total income. These points are plotted on a graph, starting from 0% income for 0% of the population.
The Lorenz curve reflects the distribution of wealth in a country compared to an egalitarian distribution, represented by the bisector of the graph. The further the curve deviates from the bisector, the greater the income inequality.
Monopsony
Monopsony is characterized by a single buyer (one company hiring labor) and many sellers (employees seeking employment).
Perfect Competition Market
The perfect competition market relies on the following assumptions:
- Homogeneity of the product.
- Large number of buyers and sellers. All are price takers.
- Agents have complete information on prices and market characteristics.
- Free entry and exit from the market.
Natural Factors, Capital, and Labor Markets
Market of Natural Factors and Capital
Natural Factors
Natural factors of production refer to all natural resources, including land, mineral stocks, and oil reserves. When considering the market for natural resources, land is often treated as a fixed factor.
The rent for land is not the price of the resource itself, but the price derived from its use. Therefore, the value of land depends on its productive capacity.
Capital Market
The capital market refers to the market for money. Lenders (those willing to provide money) and borrowers (those needing money) interact to determine the price or value of money.
The price of money, called interest, is determined by the balance between the supply and demand for money and is usually calculated as a percentage of the amount exchanged. Interest rates depend on:
- The length of the loan
- The risk involved
- The guarantee provided (endorsement or mortgages)
- The type of investment
Labor Market
The labor market includes companies seeking labor and workers offering their services.
- Companies offer jobs.
- Workers seek employment.
The market equilibrium yields a wage and the number of workers hired.
This market comprises three elements:
Work Demand (D(L))
Work demand represents the number of people companies are willing to hire at each wage level and depends on three factors:
- Wage: Inverse relationship
- Price of goods: Direct relationship
- Average productivity of workers.