Discuss frictional, structural and cyclical unemployment
Frictional unemployment occurs because there’s a time lag between labor demand and labor supply. This is because the employers do not hire the first candidate that applies for the job but are waiting for the perfect employee and the job seekers also take time to explore opportunities before taking on a job. So the time required to match labor demand with labor supply results in frictional unemployment. This type of unemployment usually doesn’t last very long and results in efficiency as there is a better match between jobs and workers.
Structural unemployment might occur because the skills demanded by the employers do not match the skills of the job seekers or because the job seekers do not live in the geographic area where their skills are demanded. Structural unemployment usually occurs because of changes in taste, technology or competition that might reduce the demand for certain skills and increase the demand for others. Cyclical unemployment usually occurs during recessions when there is a decline in production and causes less demand for labor and hence workers are laid off. Cyclical unemployment can be eliminated through effective government policy.
The government can use expansionary fiscal policy that would increase the amount of disposable income people will have. With more money to spend, there will be more demand for goods and services i. e. an increase in aggregate demand and creation of jobs. Thus expansionary fiscal policy aims at increasing consumption and in turn decreasing unemployment and/or recession. 2) Explain the “process” by which the forces of supply and demand interact to “clear the market”. “NOT ANSWERED” 3) Define the law of demand. List and discuss the determinants (shift factors) for demand.
The law of demand states that the quantity demanded of a good over a given time period is inversely related to its price, all else remaining constant. Thus, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded. Following are the factors that result in a shift in the demand curve: – Changes in consumer income: If the income increases, consumers are willing and able to buy more of a particular good at the same price causing the demand curve to shift to the right. Hence more is demanded at the going market price.
– Changes in the price of related goods: Goods normally have substitutes and any change in the prices of substitutes causes the demand curve to shift. Two goods are substitutes if an increase in the price of one good causes an increase in the demand for the other. For example, consider tea and coffee as substitutes. If the price of coffee increases, consumers will demand less of coffee and will switch to tea as a substitute and demand more of tea. Two goods are complements if they are related in such a way that an increase in the price of one, causes a decrease in the demand for the other.
For example, camera and reels are complementary goods. If the price of camera increases, people will buy less of camera and since fewer cameras will be bought, the demand for reels will also fall. – Changes in consumer expectations: A change in consumer expectations either about their income or the price of a particular good will lead to a change in demand. For example, if consumers expect that their income will increase in the future, they might want to splurge now and increase the current demand of a good.
Similarly, if consumers believe that the price of a good might increase in the future, they may buy more today at the current price causing the demand curve to shift to the right. – Changes in consumer tastes: Any change in consumer taste i. e. their likes or dislikes will lead to a shift of the demand curve. For example, the demand for fur coats has fallen since awareness about animal rights was created; people tastes changed and now less fur coats are demanded. 4) What are the three principle circumstances in which government intervention in a market would be justified in order to enhance market efficiency?
Define and provide an example of each major category. “NOT ANSWERED” 5) Every economy must answer three questions that are basic to production. List and discuss these questions/issues. Be sure to relate the questions to the issues of efficiency and equity. Every economy has to answer three basic questions regarding production namely: – What to produce: An economy must decide what goods and services to produce and since resources are limited, not everything can be produced and choices have to be made.
– How to produce: Decisions have to be made about the methods of production, whether everything should be produced locally or outsourced to foreigners and whether the production should be labor intensive or capital intensive. – For whom to produce: Businesses need to identify their target market as to who will consume the goods and services produced, whether they will be able to afford the goods and services and how will the goods be distributed among the different individuals of the society.
The questions of what, how and for whom to produce can be answered to a great extent by looking at the type of market system in place i. e. whether it’s a command economy, free market economy or a mixed economy. In a command economy, every decision is taken by the government or any regulatory body regarding what, how and for whom to produce. In a free market economy, the interaction of buyers and sellers determine the answers to the three basic questions and the government entirely stays out of it. In a mixed economy, there is a combination of government and market decision making.
But in addition to answering the three basic questions, it is also important to determine whether equity or efficiency is preferred. Equity involves fairly and evenly distributing the goods throughout the economy. However efficiency means only those goods are produced that bring the most value to the economy and opportunity cost is involved as one good is forgone in terms of other. If equity is preferred, then a command economy will operate as the government will make sure that everything that is desired by the consumers is produced and distributed evenly.
However, this may lead to a lot of inefficiencies as no country is self-sufficient and some things cost a lot to produce locally and it pays to import them. If efficiency is preferred, then a free market economy will prevail as the market forces and buyers and sellers will decide what goods will bring the most value. When producers will produce what is desired by the consumers, they will thrive and those who do not produce what is demanded, will be forced to shut down. However, the problem with free market economy is that not everybody can afford the goods and services produced and inequality will prevail.
So a mixed economy would be better as there will be a combination of equity and efficiency operating in the market and will involve qualities of both the free market as well as the command economy. 6) List the four (4) quantities that comprise the “expenditures” approach to measuring GDP. Discuss the makeup of each of these components The quantities that comprise the expenditure approach to measuring GDP are consumption, investment, government purchases and net exports. Consumption represents all the expenditure made by households during the year, in purchasing final goods and services.
Investment consists of spending by businesses on current output that is not used for present consumption. For example, firms might make expenditure in buying machinery or a factory to further produce goods and services. Changes in a firm’s inventory are also a category of investment. Inventories are stocks of goods in process as well as finished goods. A net increase in inventories means that investment has been made during the year as inventories are not bought for current consumption. Government purchases include spending by all levels of government on goods and services.
For example, government opening up public libraries or cleaning snowy roads are all classified as government expenditure. Net exports result from trade of a country with the rest of the world. It is the value of a country’s exports minus the value of its imports and includes not only goods but also services. Thus, the sum of consumption, investment, government purchases and net exports is the aggregate expenditure of the economy. C + I + G + (X – M) = Aggregate Expenditure = GDP 7) Describe the relationship between “excessive” demand and inflation
Excessive demand is created by one or more of the four sectors of a macro economy namely households, businesses, government and foreign buyers. When these four sectors want to purchase more output than the economy can produce, they compete to purchase the most of the limited supply of output and in this way, they bid up prices causing inflation. There can be various reasons for excessive demand in an economy. For example, an increase in government expenditure will lead to a shift in the aggregate demand curve to the right, thus pulling up prices.
Another reason could be the depreciation of the local currency. The depreciation causes the imports to become expensive but to foreigners the local goods become cheaper and hence more demand for local goods i. e. exports causes aggregate demand to increase. It is assumed that the economy is operating at full capacity and aggregate supply cannot be increased to match the increase in aggregate demand. Economic growth in other countries can also lead to an increase in demand for exports. If the government reduces taxes, consumers will have more of the disposable income to spend.
Thus they will demand more goods and services causing aggregate demand to increase and hence ‘too much money chasing too few goods’ will result in demand-pull inflation. The reduction in taxes can also lead to consumer confidence in the local economy, which further increases aggregate demand. So ‘excessive’ demand not matched by an increase in supply will lead to inflation in the economy. References McEachern, William. A. (1997). Economics, A Contemporary Introduction. Cincinnati: South- Western College Publishing.Sample Essay of Essayontime.com