1. The Downward Spiral

2. What happens when increase in the Rate of Production is greater than the Standard of Living:

3. Standard of Living
The quality and quantity of goods and services available to people
Your standard of living includes:
How much money you make
Type of car you drive
Size of your house
Leisure activities
Increases each year
Rate of Production = rate at which items are produced

4. Rate of Production
The increase in the Rate of Production cannot exceed the increase in the Standard of Living
Let’s see what happens if it does:
Let’s pretend that the increase in the Rate of Production is 5% and the increase in the Standard of Living is 2%

5. Widgets R Us
Widgets R Us makes widgets

6. Widgets R Us Let’s say that Widgets R Us makes 1000 gears a year
In year one they produce 1000 gears
How many will they produce in year 2?
1050
How did we arrive to this number?
There is a 5% increase in the rate of production each year

7. (this is because the increase has not started yet)
Widgets R Us
If 1000 widgets are produced in year 1, how many will be sold in year 1?
1000
(this is because the increase has not started yet)
If the standard of living increase is 2%, how many gears can Widgets R Us expect to sell in year 2?
1020

8. Let’s see what happens Year Produced Sold Surplus 1 1000 2 1050 10202
1050
1020 30 3
1102
1040 62 4
1157
1060 97 5
1207
1081
126 6
1267
165 7
1330
1124
206 8
1396
1146
250 9
1465
1168
297 10
1538
1191
347

9. Widgets R Us
As you can see, the increased surplus will result in lower production
The lower production results in layoffs
Layoffs result in an economic downward spiral

10. Downward Spiral People become unemployed Companies fire workers
People don’t buy luxury items