AS Economics and Business The economic cycle (and YED) Unit 2B By Mrs Hilton for revisionstation

Lesson Objectives At the end of today's lesson you will be able to understand what the Economic Cycle is 2. Demonstrate the impact the Economic Cycle has on businesses Outcomes Identify what the Economic Cycle is Understand how it is measured Demonstrate the various stages and the impact each stage has on a business

Starter: What does this mean to you?

The Economic Cycle ‘Fluctuations in the level of economic activity around its productive potential over a period of time’

The Economic Cycle GDP Boom Recession Recovery Slump Time

Key terms explained Boom: period when an economy is growing strongly and is operating around its productive potential (pp) Recession: A period when growth or output become negative (for two successive quarters 6 months) Recovery: the movement back from when the economy is operating below its pp to a point where it is at its PP Slump: A period where there is a particularly deep and long fall in output

The Impact on Businesses Boom High Prices High Wages High Consumer Spending Time

The Impact on Businesses Recession Businesses look for other markets Investments Fall Low Profits Redundancies Time

The Impact on Businesses Slump More redundancies Consistent high unemployment Low Consumer Spending Shops/Factories Close Time

The Impact on Businesses Recovery Increased production Wages rise Unemployment declines Consumers start to spend more Time

Slump Question What is a slump? Identify three effects that are likely to occur to a small business in the event of a slump

Boom Question What is a boom? Identify three effects that are likely to occur to a small business in the event of a Boom

Recession Question What is a recession? Identify three effects that are likely to occur to a small business in the event of a recession

Recovery question What is a recovery? Identify three effects that are likely to occur to a small business in the event of a recovery

Types of goods In a recession consumers will change their buying habits (a pattern of demand changes as income changes) if I gave you £500 now you would buy different things than if I gave you £5 There are; Normal goods – as income increases so does demand Inferior goods – as income increases demand decreases e.g. Bread, as incomes rise consumers switch to more expensive food. Margarine as incomes rise consumers switch to butter. Bus transport – as incomes rise consumers switch to their own car Luxury goods – as income rises consumers may substitute items for these types of goods. In times of recession consumer demand drops

Income Elasticity of Demand You decide…. Bus travel Cigarettes Designer clothes Fine wines Fresh vegetables Frozen vegetables Fruit juice Instant coffee International air travel Luxury chocolates Margarine Stilton Private education Private health care Stringy cheese Rail travel Shampoo Tinned meat Value “own-brand” bread

Income elasticity of demand – called YED Like PED we can calculate this to see what kind of goods they are...

Income Elasticity of Demand Formula Income elasticity of demand (Yed) measures the relationship between a change in quantity demanded and a change in real income Yed = % change in demand % change in income

What do the results mean – look for the signs More than +1 = luxury (+2, +3.5) +0 to +1 = Normal (0.5, 1,) Minus figures = inferior (-0.1, -2)

Sample question 1 A 10% increase in income will result in a 2.3% increase in demand for coffee. Calculate the YED.

Answer question 1 D/I +2.3/10 =0.23 = normal good

Sample question 2 1. During a recession, which is the most likely to suffer a fall in sales? A. Furniture stores B. Supermarkets C. Pharmacists D. Bus companies Explain why your answer is correct (1 + 3 marks)

Answer question 2 mma on next slide Answer A Furniture Its a luxury item All others are necessities Try and write a MMA to answer this question and include YED comments

Model answer including YED A recession describes a time when, for two successive three-month periods, real GDP has declined. Almost every industry will experience a decline in sales, but particularly those whose goods are considered luxuries – such as new furniture. With their high YED, sales will fall faster than real incomes drop. By contrast, all the other goods are necessities (and therefore with low YED), so we might expect their sales to hold up reasonably well.

Other types of goods to help you answer more questions Complementary Demand for one type of good will affect demand for another, purchase is somehow linked, petrol and cars

Substitute The impact of a change in price will cause consumers to switch products to an alternative good

Sample question 3 Which of the following is most likely to increase the demand for DVD players?   A A fall in incomes B A fall in the price of a substitute good C A fall in the price of a complementary good D A fall in the population size

Answer - A fall in the price of a complementary good (C) - Complementary goods are ones that are somehow linked (1 mark) - Purchasing one will lead to the purchase of its complement (1 mark). - If DVDs fall in price more will be bought thus increasing the demand for the complementary good (DVD players) (1 mark). - The opposite will happen with substitute goods (1 mark). - The other choices will also result in reduced demand (1 mark if explained fully).

Sample question 4 If an increase in a consumer’s income causes the consumer to decrease the quantity demanded of baked beans, then baked beans might best be described as A a complementary good. B an inferior good. C a normal good. D a substitute good.

Answer question 4 • Answer is option B Inferior good Inferior goods have a negative YED i.e. demand falls as income rises (1 mark). • Sales of inferior goods such as baked beans are likely to decrease when incomes rise as consumers change to ‘better’ or more attractive alternatives (1 mark) e.g. organic vegetables (1 mark). • A complementary good is one which is linked with the purchase of another good (1 mark) e.g. DVD and DVD players and baked beans are not linked to any other product (1 mark). • A substitute good is an alternative to a product (1 mark). • A normal good is a good for which demand increases as incomes rise (1 mark) therefore baked beans cannot be classed as a normal good if the quantity demanded decreases as incomes rise (1 mark) 4 marks