Challenges to the Free Market System 12-1 Unemployment 12-2 Inflation

Unemployment 12-1 LO1-1 Explain how economists measure unemployment. Identify the different types and impact of unemployment.

Unemployment 12-1 Measuring Unemployment unemployment rate discouraged worker underemployed Types of Unemployment frictional unemployment seasonal unemployment structural unemployment outsourcing cyclical unemployment full unemployment

Measuring Unemployment The unemployment rate is the percentage of the civilian labor force that is actively seeking work but is not employed. Many people without jobs are not classified as unemployed and are not counted as part of the labor force. Babies, full-time students, and retired persons do not count as unemployed. Individuals who are ill or severely disabled are not considered to be unemployed. There are other groups that are also not counted. 12-1 Unemployment

Measuring Unemployment Discouraged workers are persons who want to work, but have given up looking for work. Many people believe that during a recession, the unemployment rate underestimates the problem of people who lack work by not counting discouraged workers. Underemployed persons work at jobs below their skill levels, or work part-time when they want to work full-time. 12-1 Unemployment

Measuring Unemployment unemployment rate discouraged worker underemployment The civilian population over age 16 is 120 million and the number of these people not in the labor force is 40 million. There are 10 million unemployed people. What is the unemployment rate? Unemployment rate = unemployed × 100 civilian labor force: 8.3% = 10 million persons × 100/120 million persons; The 5 million persons who are discouraged workers are not in the civilian labor force, and therefore not counted in the unemployment rate. 12-1 Unemployment

Types of Unemployment Frictional unemployment is temporary unemployment caused by the time required for workers to move from one job to another or find initial employment. The cause of frictional employment is the transition time to match a job applicant with a vacancy. Economists consider frictional unemployment as a normal condition of any economy permitting freedom of job choice. 12-1 Unemployment

Types of Unemployment Seasonal unemployment is unemployment caused by changes in the seasons. Structural unemployment is unemployment caused when the skills of workers do not match the skills required for existing jobs. The four causes of structural unemployment are: lack of education, changes in consumer demand, technological advances, and globalization. 12-1 Unemployment

Types of Unemployment Outsourcing is the practice of a company having its work done by another company in another country. Cyclical unemployment is unemployment caused by the lack of jobs during a recession. When GDP falls, companies close, jobs disappear, and workers scramble for fewer available jobs. The Great Depression is a dramatic example of cyclical unemployment. The Great Recession beginning in 2007 is another example. 12-1 Unemployment

Measuring Unemployment Full unemployment is the rate of unemployment that exists without cyclical unemployment. Full unemployment occurs when an economy operates at an unemployment rate equal to the sum of the frictional, seasonal, and structural unemployment rates. 12-1 Unemployment

Types of Unemployment frictional unemployment seasonal unemployment structural unemployment outsourcing cyclical unemployment full unemployment Did the invention of the wheel cause frictional, seasonal, structural, or cyclical unemployment? The invention of the wheel represented a new technology for primitive people. Even in the primitive era, many workers who transported goods lost their jobs to the more efficient cart with wheels. The invention of the wheel caused structural unemployment, you are correct. 12-1 Unemployment

12-2 Inflation LO2-1 Explain the impact of inflation, how it is measured, and how it affects consumer lifestyles and decision making. LO2-2 Define the patterns of inflation in a market economy. LO2-3 Describe the causes and effects of inflation in a market economy.

Inflation 12-2 Impact of Inflation inflation Patterns of Inflation disinflation hyperinflation deflation Inflation Causes and Effects demand-pull inflation cost-push inflation real-cost inflation

Impact of Inflation Inflation is the increase in general price level for goods and services. When prices rise faster than income, buyers lose purchasing power. In other words, the money workers earn will buy less as prices rise. Rising price levels affect both consumers and producers in a market economy. As the value of the dollar goes down, it buys less. As inflation goes up, the value of the dollar goes down. 12-2 Inflation

How does inflation affect a person’s income and lifestyle? Impact of Inflation inflation How does inflation affect a person’s income and lifestyle? Inflation reduces the purchasing power of income and savings. It forces most people to give up some types of spending. 12-2 Inflation

Patterns of Inflation When prices are rising but the rate of increase is slowing, the economy is in a period of disinflation. When prices are rising so rapidly that they are out of control, there is hyperinflation. When the general level of prices is decreasing, the economy is experiencing a period of deflation. 12-2 Inflation

How is disinflation different from inflation? Patterns of Inflation disinflation hyperinflation deflation How is disinflation different from inflation? Disinflation is a slowing of how fast prices are going up while inflation simply refers to an increase in the average price level. 12-2 Inflation

Inflation Causes and Effects Demand-pull inflation results in higher prices because consumers want to buy more goods and services than producers are willing or able to supply. Demand-pull inflation is the most common form of inflation. This type of inflation is often described as “too many dollars chasing too few goods.” 12-2 Inflation

Inflation Causes and Effects Cost-push inflation occurs when producers raise prices because their costs to create products are rising. For example, when wages go up, the cost of producing a product goes up. Producers raise prices to cover the increased costs. If they do not raise prices, profits will shrink. 12-2 Inflation

Inflation Causes and Effects As resources become scarce or more difficult to get, prices rise in the form of real-cost inflation. Over time, resources in high demand may shrink in supply. To avoid this type of inflation, societies must find alternate resources or products or change their habits to reduce the need for the resource. Real-cost inflation can result from a combination of demand-pull and cost-push happening at the same time. 12-2 Inflation

What is the most common form of inflation? Impact of Inflation demand-pull inflation cost-push inflation real-cost inflation What is the most common form of inflation? The most common type of inflation is demand-pull inflation. 12-2 Inflation