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By the end of this section, you will be able to:
  • Explain the poverty trap, noting how it is impacted by government programs
  • Identify potential issues in government programs that seek to reduce poverty
  • Calculate a budget constraint line that represents the poverty trap

Can you give people too much help, or the wrong kind of help? When people are provided with food, shelter, healthcare, income, and other necessities, assistance may reduce their incentive to work. Consider a program to fight poverty that works in this reasonable-sounding manner: the government provides assistance to the poor, but as the poor earn income to support themselves, the government reduces the level of assistance it provides. With such a program, every time a poor person earns $100, the person loses $100 in government support. As a result, the person experiences no net gain for working. Economists call this problem the poverty trap    .

Consider the situation faced by a single-parent family. A single mother (earning $8 an hour) with two children, as illustrated in [link] . First, consider the labor-leisure budget constraint faced by this family in a situation without government assistance. On the horizontal axis is hours of leisure (or time spent with family responsibilities) increasing in quantity from right to left. Also on the horizontal axis is the number of hours at paid work, going from zero hours on the right to the maximum of 2,500 hours on the left. On the vertical axis is the amount of income per year rising from low to higher amounts of income. The budget constraint line shows that at zero hours of leisure and 2,500 hours of work, the maximum amount of income is $20,000 ($8 × 2,500 hours). At the other extreme of the budget constraint line, an individual would work zero hours, earn zero income, but enjoy 2,500 hours of leisure. At point A on the budget constraint line    , by working 40 hours a week, 50 weeks a year, the utility-maximizing choice is to work a total of 2,000 hours per year and earn $16,000.

Now suppose that a government antipoverty program guarantees every family with a single mother and two children $18,000 in income. This is represented on the graph by a horizontal line at $18,000. With this program, each time the mother earns $1,000, the government will deduct $1,000 of its support. [link] shows what will happen at each combination of work and government support.

The poverty trap in action

The graph shows a downward sloping line that begins at $20,000 on the y-axis and ends at 2,500 on the x-axis. A horizontal line extends from $18,000 on the y-axis. A dashed plum line extends from $16,000 on the y-axis and intersects with the vertical line extending from 500 on the x-axis at point A. Beneath the x-axis is an arrow pointing to the right indicating leisure (hours) and an arrow pointing to the left indicating labor (hours).
The original choice is 500 hours of leisure, 2,000 hours of work at point A, and income of $16,000. With a guaranteed income of $18,000, this family would receive $18,000 whether it provides zero hours of work or 2,000 hours of work. Only if the family provides, say, 2,300 hours of work does its income rise above the guaranteed level of $18,000—and even then, the marginal gain to income from working many hours is small.
Total income at various combinations of work and support
Amount Worked (hours) Total Earnings Government Support Total Income
0 0 $18,000 $18,000
500 $4,000 $14,000 $18,000
1,000 $8,000 $10,000 $18,000
1,500 $12,000 $6,000 $18,000
2,000 $16,000 $2,000 $18,000
2,500 $20,000 0 $20,000

Questions & Answers

what are the factors that affect international organization
Imeobong Reply
Organizational structure,communication,mission
Ogunsola
what is international organization
Imeobong Reply
discuss how international organization affect business in Nigeria
Imeobong
An international organization is an organization with an international membership, scope, or presence.
Avishek
thanks
Imeobong
what are the factors that affect demand and commodity
Beatrice Reply
if a firm stays on the same isoquant it means ? a. output missteps decrease b. output must stay. the same c. output must increase d. quantity of labour and capital employed must remain the same e. none
Niza Reply
A
Were
A
alyssa
B
SEMAN
A
Darren
B
Bertilla
D
Romeo
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Bertilla
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Niza
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Niza
B
Foley
d
Fasae
b
Alicia
a
Mohammed
hi
DINA
d
DINA
d) none. because isoquants meant different combination of inputs give same level of out and higher the isoquants gives higher the level of output
ezhilarasan
okay
Bertilla
analyse this table showing how this affect the law of diminishing demand return
michael Reply
What are diminishing marginal returns as they relate to costs?
michael
what are diminishing demand
Bertilla
please can you explain it to me because am new to economics
michael
the law of diminishing state that as more and more variable factor is added to a fixed cost, it will increase first and later its begins to fall until its get to zero. that were ur mc equal to zero
Fasae
thanks dr
Bertilla
The law of diminishing demand states that, if the price of a product is raised, a smaller quantity will be demanded and if the price of a product is lowered, a greater quantity will be demanded.
Were
The law of diminishing returns, also referred to as the law of diminishing marginal returns, states that in a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, ceteris puribus
Were
guys I need to know what is meant by basic economic mathematics and explain please
Lovemore Reply
It's also the usage of mathematical tools to express and analyse economic problems.
Rasaq
so basically it's the use of mathematical formulas to solve the problems under demand and supply right...
Lovemore
Yes, though economic analysis majorly has to deal with demand and supply forces in fact the back bone of economics rest on demand and supply but there are other functions like consumption function, implicit ,explicit, monotonic( constant, increasing, decreasing), transcendential, homogeneous, polyn
Rasaq
wat improvement do economic has with our life
Aminata Reply
it help us how to use our limited resources to satisfy our unlimited wants
Pagnol
Economics assit in understanding the pre-requisite for Growth and developmen and how the workings of the economy operates.
Rasaq
Economic helps us to manager our limited resources, how to expand it, etc over unlimited want
Eagle
Economics is the social Science in which we study how scarce resources are allocated for the betterment of human being.
Ali Reply
what is equilibrium point
Happiness Reply
where price and quantity demanded meet
Pagnol
is the point where price an quantity demanded meet
Aminata
why do consumer demand curve tend to move downward slope
Aminata
Equilibrium point is the point at which quantity demand equals quantity supply.
Rasaq
What is monopoly
Ezekiel Reply
Is a strict example of an imperfect market where there is only one seller and many buyer for a particular product.
Rasaq
what is economics
BUKENYA Reply
economics us behavior. Of people, nations, markets etc. It has much to do with reactions. watch MSNBC. Bloomberg. everyday they talk about how the markets react to an piece of news, legislation, interest rates etc. Interesting volatile stuff
TOM
but, it also react with science
ezhilarasan
economic is a science with study's the behavior of people,market and price
Bertilla
it's a science which study the behavior of people ,market n price
Bertilla
What is opportunity cost?
Junior
opp. cost~a benefit, profit or value of something that must be given up to acquire or achieve something else
Kim
or something that you foregone
Kim
who is the father of economic
Yirtutey Reply
Adam smith
shaikh
modern father is Adam smith
Bilal
Adam smith
Nazifi
what is backward bend
Florence Reply
It's a curve that reverses direction
Ajibade
Good evening friends
Kojo
Evening
Ajibade
evening
Emmanuel
hi
Lawrence
Any Nigerian lady to meet here Well on eco ground
Suleiman
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Kojo
hello
James
yeah
Kojo
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James
cool
Kojo
Ok
James
Good morning
Junior
morning all
Emeka
Morning
Ajibade
😶g
Maaz
moaz taha u r egyptian aren't u ?
Marwa
marwa no
Maaz
how economic effect the Market
Abdikarem
what is the difference between statistic and statistics?
Shafiu
One of the Principle of Economics states "Market is the best place to organize economic activies". However, market may fail if it does not perform it's necessary expected functions like Exercising real forces of demand and supply, contact where transactions are made etc. Though government may int
Rasaq
Through the Business cycle or the trade cycle.
Rasaq
it can can be described as when the demand is insufficient
Amaan Reply
high Dublin divino through Higginbotham
Shubham Reply
How does exchange rate affect the demand and supply?
austine
You mean demand and supply of currency ?
Jahangir
Hello
Hann
Hi
Jahangir
Am debby
Hann
am jahangir
Jahangir
how are you
Ogunsola
I am All fine Wbu ?
Jahangir
doing great
Ogunsola
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Mudassar
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Hann
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Mudassar
Ogunsola
are you help for your country of economy leavel
Mutha
hi
Hammed
Hello
Assan
hi
Pranshi
Hello
Kamal
hi
Pranshi
hi
Abbas
hi
Abdirazak
ki sah botine
Neyshawn
hi
Nasir
Hello Economist
Nasir
hello
Victor
Hie... may anyone give me examples of countries that successfully implemented import substitution industrialisation.
Thabo
Nigeria
Junior
hey I'm emma from Uganda
niwagaba
Hello
Abraham
What is the difference between Demand and Quantity Demanded?
Weedh
Demand refers to how much a product is desired by buyer mean while quantity demanded refers to the amount of product a buyer is willing to buy at a certain price.
Junior
Good evening
Ajibade
Evening
Junior
evening
Ogunsola
someone wat is d textbook to read for banking and finance course
ayomide
Evening
Anjorin
Hw r u doing
Faku
yh
Benj
I'm good, u?
Anjorin
demand is the various quantity of goods or services a consumer is Willing and able to buy at a particular price over s given period of time while quantity demanded is the amount of goods or services being paid for
Florence
Good
Awudu
discuss how international organization affect business
Imeobong

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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