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--3.3.1 'INCOME' vs 'WEALTH'--
--3.3.1 'INCOME' vs 'WEALTH'--
--WHAT IS INCOME?--
"INCOME refers to the FLOW of money received by an individual or household over a period of time, usually from providing factors of production or receiving transfer payments."
"INCOME INEQUALITY refers to the unequal distribution of income between individuals or households over a period of time."
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--TASK--
"What income-earning factors of production do you actually own? Can you link it to why you are actually sitting in this classroom now?"
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"That's right, you own your own labour, and as you know, the reward for providing this factor is called 'wages', and ultimately your wage is heavily linked to your level of education, hence why you are here."
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--WHAT IS WEALTH?--
"WEALTH refers to the total net monetary value of the 'STOCK' OF ASSETS owned by an individual or household at a particular point in time, after deducting any outstanding LIABILITIES (debts, aka, what you owe). It is often called your 'NET-WORTH'.
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NET WORTH = ASSETS - LIABILITIES
= '$-value of what you own' - '$-value of what you owe'
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"WEALTH INEQUALITY refers to the unequal distribution of net wealth between individuals or households at a particular point in time."
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--TASK--
"Look at this individual's financial position, and see if you can see...
"...how income generates wealth..."
"...how wealth generates income...and..."
"...how wealth increases without changes in income."
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"That's right, income can increase wealth, as when an individual spends less than they earn and either saves it or buys an asset like a share, their wealth increases..."
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"...in addition, wealth can generate income, as owning assets such as rental properties can generate rent, which adds to your income, which, if spent, can give you a better quality of life, or if it is saved or used to buy another asset, it adds further to your wealth..."
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"...and finally we can see that wealth increases without any changes in income, as their market value can increase (this is called 'capital gains'), as is the case with most properties over time."
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--TASK--
"Are you a HIGH NET WORTH INDIVIDUAL?" List the major ASSETS you OWN and any LIABILITES that you OWE?"
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"You likely have no liabilities but maybe some assets right"
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"Do you have a pokemon collection?"
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"Do you have a sneaker collection?"
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"Do you have a used phone collection?"
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"Do you have any vintage football shirts?"
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"I'm sure you have a used clothes collection, so why not pop along to 2nd Street and see what you can get for them?"
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--TASK--
"Explain in the context of a college student who has taken out school loans what their net worth could be, with reference to income and wealth, assets and liabiities."
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--3.3.2 MEASURING INEQUALITY--
--3.3.2 MEASURING INEQUALITY--
--TASK--
"Look at the diagram below and find the % of wealth held by the richest 1% of the population in South Africa, then switch to the richest 10%." "Do you think this is fair?" "What about your country?"
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"Let's switch our focus to 'income share of the richest 1%'."
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"This data is frequently used to make headlines like."
"In the headline, it mentions that the '..top 10% of income earners earn more than the other 90%', which means the richest income decile (the richest 10% of households in the world) receives more than 50% of total global income."
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"We can prove this if we use decile distribution. You can see that the top 10% of income earners receive the same as the other 90%'; 50% each."
"These tables are great, but there is an even more visual form of income inequality that this data can be transformed into, called a Lorenz curve."
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--TASK--
"Using the decile data above, we build the curve as follows."
"What do you notice about the curves' 'DISTANCE' from the line of perfect equality and the level of inequality?"
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"That's right! The further the Lorenz curve lies below the line of perfect equality, the greater the degree of income inequality, and vice versa.
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--TASK--
"Switch between the curves below." "What do you notice about the AREA between the Lorenz curve and the line of perfect equality and the TOTAL AREA underneath the line of perfect equality as income becomes more unequal and vice versa?"
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"That's right; as income inequality increases, the area between the Lorenz curve and the line of perfect equality ('A') gets bigger, whilst the total area below the line of equality ('B') remains the same and vice versa."
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--TASK--
"Can you think why this could be useful when you want to compare inequality changes over many years or between many countries?" (Hint: "Imagine you wanted to compare inequality changes in the US over the past decade using a Lorenz curve diagram.")
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"That's right; it would look so stacked, and slight changes are undistinguishable, making the Lorenz curve pretty useless when comparing multiple economies and time periods..."
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"...thankfully, if we measure area 'A' as a proportion of area 'B' we could convert the information contained in a Lorenz curve into a single number called a GINI COEFFICIENT with a value between 0 and 1, making it much easier to compare to other ginis."
Gini Coefficient = Area A / Area B
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"Look at the diagram below. What does a value closer to one mean in terms of inequality?"
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That's right, the closer the Gini coefficient is to 1, the greater the degree of income inequality, and vice versa."
"Now let's use the GINI COEFFICIENT to compare the last ten years of inequality in the US to see if it's clearer than using the Lorenz."
--3.3.3 REASONS FOR INEQUALITY--
--3.3.3 REASONS FOR INEQUALITY--
--TASK--
"Can you guess why these workers have high incomes/wealth?"
"We know the relationship between income and wealth, but what are the reasons why certain individuals receive different amounts of income and wealth?"
"Let's look at why incomes differ."
High demand
Low supply
--3.3.4 POLICIES--
--3.3.4 POLICIES--
--A MINIMUM WAGE--
--A MINIMUM WAGE--
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--DEFINITION--
"A MINIMUM WAGE is a legally enforced wage floor set by the government, below which employers cannot legally pay eligible workers. The main purpose is to protect low-paid workers by ensuring that they receive at least a 'living wage'."
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--LABOUR MARKET DIAGRAM--
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--TASK--
"Look at the image below. What type of market do you see?" "What good/service is being traded?" "Who is the producer, and who is the consumer of this product?" "What is the price of this product?"
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"That's right, this is a labour market, in which the owners/producers of labour resources (namely me and you) 'supply' them, whilst the employers/consumers of this resource 'demand' (or 'employ') them, and the market determines an equilibrium 'wage rate' as the price."
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"We can illustrate this using a labour market diagram."
--EFFECTIVENESS--
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"We learned in the previous unit that a minimum price creates a surplus as producers are more willing to supply at higher prices, whilst consumers are less willing to demand at higher prices, so let's apply this to the labour market and see its impact."
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--TASK--
"Use the labour-market diagram below to explain what happens to the number of unemployed workers and the actual total wage income when the minimum wage increases and becomes more elastic?" "Who are the real winners and losers?"
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"That's right, as the minimum wage is raised above the equilibrium wage, it creates a surplus of labour, aka 'unemployment', as higher labour costs cause employers to reduce their demand ('a contraction in demand') and higher labour rewards incentivise workers to supply more labour ('an extension in supply').
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"In addition, when the demand for labour becomes more elastic, this increase in unemployment (decrease in employment) gets even larger."
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"...in terms of the total earnings, they only increase when the demand is inelastic."
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"...and finally, in terms of winners and losers, we can see that only those who remain employed get the benefit of the higher minimum wage, and the rest are left unemployed."
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--TASK--
"So a minimum wage put on an industry with very elastic demand will result in a lot of unemployment, right? So ask yourself which group of workers will be impacted the most by changes in the minimum wage and which group of workers are the most 'replacable', making their PED of labour the most elastic?"
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"That's right, the minimum wage is only impacting low-level workers, such as waiters, and warehouse workers; and as their duties tend to be less complex they are more prone to automation (if not now, very soon, given technological developments and falling costs), hence.....
--TRANSFER PAYMENTS--
--TRANSFER PAYMENTS--
--TASK--
"As you have just seen one of the biggest concerns about transfer payments is the extensive 'abuse' of the system, with people claiming assistance without actually needing it, can you
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--DEFINITION--
"TRANSFER PAYMENTS are payments made by the government without receiving goods or services in return. Examples include unemployment benefits, pensions, disability benefits and means-tested welfare payments. The main purpose is to redistribute purchasing power towards lower-income households using tax-financed transfer payments."
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Does everybody get them?
There are two types of benefits; one is given to everyone regardless of any qualifying criteria, and tehse are called UNIVERSAL BENEFITS, such as UNIVERSAL HEALTHCARE
EFFECTIVENESS
--TASK--
"One of the biggest concerns about transfer payments is the extensive 'abuse' of the system, with people claiming assistance without actually needing it, hence many of them are
- The distinction between universal and means-tested benefits.
- How transfer payments increase disposable income without directly increasing the recipient's earned income.
- Why they can reduce relative poverty and absolute poverty.
Evaluation: Consider government expenditure, taxation requirements, targeting errors, work incentives and the possibility of welfare dependency.
Students should recognise that transfer payments primarily redistribute income, although recipients who save the payments may eventually accumulate more wealth.
--TAXATION--
--TAXATION--
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"Yes, TAX is unavoidable; just listen to this guy..."
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"That's right in the UK, everything is taxed!"
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"The above infographic features many types of tax, but they all broadly fall into two categories: DIRECT TAXES and INDIRECT TAXES, and they can be used to impact both INCOME INEQUALITY and WEALTH INEQUALITY."
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"Of all these tax types, which one do you think generates the most tax revenue for the government to redistribute?"
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"That's right, it's INCOME TAX, which is DIRECT and is aimed at REDUCING INCOME INEQUALITY, but how?"
--INCOME TAX--
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--OBJECTIVE--
"One of the major goals of income tax is to redistribute income from the rich to the poor in order to reduce the 'income gap', which can be expressed as either an absolute monetary difference or a relative ratio (e.g., '5 times richer')."
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"So how do we get more money from the rich and less from the poor to make things fairer?" "Should we use a single % rate or have different rates as income grows?"
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--PROPORTIONAL TAX RATES--
"PROPORTIONAL TAXES refer to tax structures where the % of income paid as taxes (tax paid / income) REMAINS THE SAME as a person’s income rises."
--TASK--
"Move the slider below to increase or decrease the proportional rate. What do you notice about the absolute and relative gaps?"
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"That's right; the higher the income level, the greater the amount of tax paid, which reduces the absolute income gap, but the relative ratio stays the same." "Isn't this what we want, the rich paying more, sounds fair to me, but can we make it even fairer?"
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--PROGRESSIVE TAX RATES--
"PROGRESSIVE TAXES refer to tax structures where the % of income paid as taxes INCREASES as a person’s income rises."
--TASK--
"Move the slider below from left to right, starting with a proportional tax and moving to a more and more progressive one. What do you notice about the absolute gap in incomes and the income ratio?"
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"That's right; the MORE PROGRESSIVE THE 'MARGINAL' TAX RATES, the greater the amount of tax paid, which reduces the absolute income gap as well as relative ratio."
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--TASK--
"Go to the HK income tax calculator and work out how much direct tax you pay if you are single and earn $1,000,000."
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"Press 'compute' and it should say 'tax payable by you' is $127,350, which you should notice is not based on a taxable income of $1,000,000 but $855,000 instead. Can you see why?"
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"Yes, that's right. In HK you are given a 'tax-free income allowance' of $145,000 (in HK called the 'basic allowance'), which you deduct from your income."
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"So how did they calculate $127,350, from $855,000?"
"Use the step-by-step calculator below using the 2026/27 HK marginal tax rates to see for yourself?"
--REGRESSIVE TAX RATES--
"REGRESSIVE TAXES refer to tax structures where the % of income paid as taxes (tax paid / income) DECREASES as a person’s income rises."
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"WHY ARE ALL INDIRECT TAXES REGRESSIVE?"
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"We defined INDIRECT TAXES as basically taxes on spending, such as the 7% GST you pay on purchases in Singapore. If we look at the example receipt below, the 7% GST tax amounts to $1.73 for this purchase."
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--TASK--
"Use the slider below to prove that a 15% indirect tax, meets the definition of a regressive tax."
--WEALTH TAXES--
"Should everyone have an equal starting point in life, or should parents have the right to pass on the wealth they have earned?"
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"Look at the slide show, do you think this is fair?"
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"Why might inherited wealth be considered unfair?"
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--TASK--
"Use these contrasting 'cycles' to write an argument as to why inherited wealth is unfair."
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"Regardless of your viewpoint, something remarkable is about to happen with reagrds wealth inequality."
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"That's right,
inheritance taxes and capital taxes
Policy Required understanding
Inheritance tax Taxes on inherited estates or transfers of wealth can reduce the intergenerational concentration of wealth.
Capital taxes Taxes on capital gains or certain forms of wealth can reduce the accumulation or concentration of wealth.
Evaluation: Include possible disincentives to work, save, invest or undertake entrepreneurship; tax avoidance and evasion; capital mobility; exemptions; and the effectiveness of enforcement.
An important distinction: taxation by itself does not necessarily reduce inequality substantially. Its redistributive effect also depends on how the government uses the revenue.
--EFFECTIVENESS--
--TASK--
"Look at the diagrams below. What can we conclude about the impact of taxation on income inequality in the US?"
--STATE PROVISION--
--STATE PROVISION--
PROGRESSIVE INCOME TAX
4. State provision of essential goods and services
DEPTH: MODERATE — LINK TO REAL INCOME AND OPPORTUNITY
Students should understand:
- Government provision of essential services, such as healthcare, education and housing support.
- How free or subsidised services particularly benefit households that would otherwise struggle to afford them.
- How provision can reduce inequality in living standards even without changing households' money incomes.
- How education and healthcare can improve human capital, productivity and future earning potential.
- The distinction between immediate redistribution of benefits and longer-term reductions in inequality of opportunity.
Evaluation: Government expenditure, opportunity cost, service quality, accessibility, targeting and whether higher-income households also benefit.
A useful example is publicly funded education in Hong Kong, where access to schooling can improve opportunities for children from lower-income households.
5. What students must be able to evaluate
I would teach students to assess every policy using the same four questions.
Select a policy to see the expected AS-level analysis.
Minimum wage
Transfer payments
Progressive taxation
State provision
How does it work?
Reduces after-tax income differences and raises revenue
Who benefits?
Lower-income households, if revenue is redistributed
What are its limitations?
Potential work, saving and investment disincentives
What determines its effectiveness?
Depends on tax structure, compliance and use of revenue
6. Diagrams required
For AS-level teaching, I would prioritise:
- Minimum wage diagram: essential application of labour market supply and demand.
- Lorenz curve: useful to illustrate a possible reduction in inequality following redistribution, with the curve moving towards the line of perfect equality.
- Progressive tax schedules: useful numerical examples or simple charts demonstrating increasing average tax rates, rather than complex tax diagrams.
The syllabus does not prescribe a separate diagram for each redistribution policy. Students should use diagrams when they help explain the economic mechanism, not simply for decoration.
7. Suggested teaching sequence
Stage Content Time
1 Why governments redistribute income and wealth 10 min
2 Minimum wage, diagram and evaluation 25 min
3 Transfer payments 15 min
4 Progressive income, inheritance and capital taxes 30 min
5 State provision of essential services 20 min
6 Compare policies, evaluate and practise exam questions 20 min
Suggested total: 120 minutes, excluding additional assessment time.
8. What I would not teach in excessive depth
For AS 3.3.4, there is no need to spend substantial time on:
- Advanced optimal taxation theory or detailed Laffer curve analysis.
- Complex inheritance tax legislation or capital gains tax calculations.
- Formal welfare economics models of redistribution.
- Detailed econometric measurement of the effects of redistribution.
- Sophisticated general equilibrium labour market models.
These go beyond what is necessary for this specific AS subsection.
My suggested standard for exam readiness
A student who has mastered 3.3.4 should be able to answer:
"Evaluate the effectiveness of government policies in reducing income and wealth inequality."
They should explain the mechanisms of at least two relevant policies accurately, develop logical chains of economic analysis, distinguish income from wealth inequality, and make a supported judgement about which policies are most effective under different circumstances.
The most important conceptual distinction to reinforce is that a policy which reduces income inequality does not necessarily reduce wealth inequality to the same extent. Minimum wages and transfer payments primarily address income distribution, whereas inheritance and certain capital taxes more directly address the distribution and accumulation of wealth.
That is the depth I would target for a strong Cambridge AS Economics student, without unnecessarily extending into A2 material.
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