Overview: Fairness

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Simple circular flow highlights two essential markets, the markets for goods and services and the resource market (the market in which businesses buy inputs). This group of readings examines an important problem centered in the resource or input markets: the question of fairness. A market system tends to reward based on contribution to production, and because contributions to production are very uneven, so too are incomes. Some people find this aspect of markets unsettling. Fairness is, along with the concept of economic efficiency, a main normative judgment used to evaluate economic systems and government policies.

The readings begin by reviewing the forces that determine the amount of income people earn in a market economy. We then look at several positions about fairness and follow with a discussion of government policies that change the distribution of income.

After you complete this unit, you should be able to:

  • Define derived demand.
  • Explain why incomes tend to reflect marginal productivity in a competitive market system.
  • Explain why in a winner-take-all market incomes do not reflect marginal productivity.
  • List three views of what fairness implies about income distribution.
  • List three reasons that the market value of a resource can change and give an example of each.
  • Interpret a Lorenz curve.
Copyright Robert Schenk