Economic Theory: Microeconomics Notes Part - 1

IMPORTANT CURVES

1. LORENZ CURVE:

• Lorenz curve is graphical representation of income distribution in the society.
• It was given by Max O Lorentz in 1905. It is used to analyze inequality prevailing in the population.
• In this graph, the cumulative percentage of national income is plotted against the cumulative percentage of households.
• The degree to which the curve sags away from the line of perfect equality is the measure of inequality in society.
• It is given by Gini’s coefficient.
• Gini’s coefficient: It is the proportion of the shaded region with respect to the area corresponding to the line of perfect equality.  Higher the value more is the inequality in society.

1. LAFFER CURVE:

• Laffer curve represents the relationship between tax collection and levied tax rates by the state authorities.
• It states that as the tax rate increases from the low level, tax collection also increases but as the tax rate increases beyond a critical limit, tax collection starts falling.
• This can be due to lower profitability and higher incentive to cheat associated with higher taxes.

1. PHILLIPS CURVE:

• It was given by A. William Phillips, a New Zealand economist.
• According to this, there is an inverse and stable relationship between inflation and unemployment. As one falls, other increase.

• There is also a term which defines the simultaneous existence of high inflation and high unemployment i.e. low growth with high inflation, which is known as stagflation.

1. KUZNETS CURVE:

• Kuznets curve is based on a hypothesis forwarded by an economist Simon Kuznets.
• According to the hypothesis, when a country starts developing, economic inequalities first increases for a period of time but after a threshold when a certain average income is attained, economic inequalities begin to decrease.
• It is thus represented as an inverted U-shaped graph as shown below.

• Similar in the line is the Environment Kuznets curve.

1. ENVIRONMENT KUZNETS CURVE:

• It shows the relationship between economic progress on one hand and environmental degradation over a period of time caused in lieu of that economic progress.
• It says, as the economy starts the journey of development, pollution in first phase increases but with further development of the economy, pollution rates begin to decline.
• And eventually, both economic progress and environment maintenance go hand in hand.

When economic stages of growth are plotted on the x-axis and environmental degradation on the y-axis, the environment Kuznets curve is given by inverted U shape.

We hope Economic Theory: Microeconomics Notes Part - 1 helped you to understand important curves for UGC NET Exam, you can also read Economic Theory: Microeconomics Notes Part - 2 for summarized notes on microeconomics curves and laws.

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