Microeconomics · Unit 5: Factor Markets · 14 min read · Updated 2026-05-11
The Market Distribution of Income — AP Microeconomics
AP Microeconomics · Unit 5: Factor Markets · 14 min read
1. Core Frameworks for Income Distribution★☆☆☆☆⏱ 2 min
The market distribution of income describes how total income earned by factor owners in a market system is allocated across individual households or across factors of production. It addresses the question of who earns what in a market economy, rather than how much total output is produced.
**Personal distribution of income**: How income is split across individual households sorted by income level
**Functional distribution of income**: How income is split across the four factors of production (labor, capital, land, entrepreneurship)
Per AP CED, this topic makes up 2-4% of the total exam score, typically appearing as 1-2 multiple-choice questions, and occasionally as part of a multi-part free-response question paired with factor market concepts.
2. Measuring Inequality: The Lorenz Curve★★☆☆☆⏱ 3 min
The Lorenz curve is the primary graphical tool for measuring personal income inequality. It plots the cumulative share of total income earned on the y-axis against the cumulative share of the population (sorted from poorest to richest) on the x-axis.
If income is not perfectly equally distributed, the Lorenz curve bows below the 45-degree line. The farther the curve bows away from the 45-degree line, the more unequal the distribution of income.
3. The Gini Coefficient★★☆☆☆⏱ 3 min
The Gini coefficient is a numerical summary of income inequality derived directly from the Lorenz curve. It condenses the graph's information into a single number between 0 and 1 that can be used to compare inequality across time or regions.
The base formula for the Gini coefficient is:
G = \frac{A}{A + B}
Where $A$ = the area between the 45-degree line of perfect equality and the actual Lorenz curve, and $B$ = the area under the Lorenz curve. Since the total area under the 45-degree line is $A+B = 0.5$, the formula simplifies to:
G = 2A
A Gini coefficient of 0 means perfect equality, while a Gini of 1 means perfect inequality (one household holds all income). Real-world Gini coefficients almost always fall between 0.2 (very equal) and 0.5 (very unequal).
4. Marginal Productivity Theory of Income Distribution★★★☆☆⏱ 3 min
Marginal productivity theory is the core economic theory that explains why market economies generate unequal income distributions. The theory states that in competitive markets, each factor of production is paid its marginal revenue product (MRP), the additional revenue generated by the last unit of that factor employed.
5. Common Sources of Income Inequality★★☆☆☆⏱ 3 min
Beyond differences in marginal productivity, AP Microeconomics frequently tests these key sources of income and wage inequality:
Differences in human capital: accumulated education, training, and experience increase productivity and wages
Ability differences: natural talent for high-productivity tasks leads to higher income
Compensating differentials: higher wages for dangerous or unpleasant jobs
Market power: unions raise member wages, monopoly profits increase business owner income
Discrimination: exclusion from high-paying jobs reduces income for affected groups
Inheritance: inherited wealth generates capital income independent of personal productivity
Common Pitfalls
Why: Students mix up direction because they forget the population is sorted from poorest to richest, not the reverse
Why: Students forget that $A+B = 0.5$, so dividing by 0.5 equals multiplying by 2
Why: Students confuse equal opportunity with equal outcome
Why: The terms sound similar but describe different concepts
Why: Students confuse relative distribution with total income level