Figure 2.22: Share of Economic Profits in US Non-Financial Corporate Sector (1946–2016)

In a hypothetical national economy, researchers observe that the average markup—the percentage by which a firm's selling price exceeds its direct cost of production—has doubled over the past two decades. Assuming no other significant economic changes, what is the most direct and likely consequence of this trend on the distribution of that nation's income?

The observed long-term increase in the share of national income going to economic profits in the U.S. is primarily attributed to a corresponding long-term increase in labor productivity, which has allowed firms to generate more value without raising prices relative to costs.

Market Consolidation and Income Distribution

Firm Pricing and Income Distribution

Relationship Between Firm Markups and National Income Distribution

Match each economic phenomenon with its most direct description or implication.

A politician argues, 'The fact that the share of our national income going to business profits has been rising for decades is a positive sign. It shows our companies are becoming more efficient and innovative, which benefits everyone.' Based on the economic relationship between firm pricing behavior and income distribution, which of the following statements provides the most accurate critique of this argument?

Connecting Firm Pricing to National Income Distribution

Firm Markups and Income Distribution

Analyzing Market Structure's Impact on Income Distribution