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Managerial Economics Essay

Q.1.0) For each of the following events, assume that either the supply curve or the demand curve (not both shifted). Explain which curve shifted and indicate the direction of the shift.

a.From 1950 to 1979 the wages paid to fruit pickers increased while the number of fruit pickers employed decreased.

b.During the same period the price of radio sets declined, while the number of radio sets purchased increased.

c.Housing prices are rising but more houses are sold.

d.Australian Airlines reduces its average plane fare by 30 percent in order to attract more customers.


a) In this case the number of the fruit pickers has decreased while the wages of the fruit pickers has increased. Thus, the demand has not changed. The supply of the fruit pickers has decreased, hence, the fruit pickers supply has shifted to the left.

b) In this case the price of the radio sets declined while the number of radio sets purchased increased. This means the demand has increased. The demand curve has shifted to the right.

c) In this case the housing prices are rising but more houses were sold. The demand of the houses has increased. The demand curve has moved to the right.

d) In this the Australian Airlines reduces its average plane fare by 30 percent in order to attract more customers. The aim here is increase the revenue in the future. The supply is been increased to accommodate the increasing customers. The supply curve is moved to the right.

Q.2.0) Explain the meaning of elasticity? What are the different types of elasticities? What are the factors that affect each type of elasticity? Of what use are these elasticities to business?


Elasticity is a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

The Elasticity is one of the important factors to measure the market condition, the market character and depicts a comprehensive picture of the supply, demand relation.

The different types of Elasticities are Own price elasticity, cross-price elasticity, income elasticity and other elasticity such as own advertisement elasticity and cross-advertisement elasticity.

2.1. Own price elasticity: A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.

EdQx, Px Percentage change in quantity demanded = %∆Qdx

= Percentage change in price of the good %∆Px

The Own price elasticity of demand is measured in terms of its absolute value, if the absolute value is greater than one (1) is said to be elastic, if the absolute value is less than one (1) is said to be inelastic and if the absolute value is equal to one (1) is said to be unitary.

2.1.1 Elastic demand: Demand is Elastic if the absolute value of the own price elasticity is greater than 1.

│EdQx,Px│> 1

This means that the percentage change in the quantity demanded is more than the percentage change in the price of the good. Generally, the demand is elastic for consumer goods. The important point is when the total revenue increases (decreases) as a result of a fall (rise) in price, demand is elastic.

2.1.2 Inelastic demand: Demand is inelastic if the absolute value of the own price elasticity is less than 1.

│EdQx,Px│< 1

This means that the percentage change in the quantity demanded is less than the percentage change in the percentage change in the price of the good. The demand is elastic for the daily requirement goods, specialty goods. The important point is when the total revenue decrease (increases) as a result of a fall (rise) in price, demand is inelastic.

2.1.3 Unitary elastic demand: Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1.

│EdQx, Px│= 1

This means that the percentage change in the price is equal to the percentage change in quantity demanded of the good. As the percentage change in price is equal to the percentage change in the quantity demanded, the total revenue does not change as price changes.

2.1.4 Perfectly elastic demand: A condition in which a small percentage change in price brings about an infinite percentage change in quantity demanded.

│EdQx, Px│= ∞

2.1.5 Perfectly inelastic demand: A condition in which the quantity demanded does not change as the price changes.

│EdQx, Px│= 0

2.1.6 Influencing factors: The price elasticity is determined the following factors, the availability of the substitutes, time factor and the expenditure share of the product in consumer’s budget.

* Availability of viable options: The price elasticity is very much influenced by the availability of substitutes. The price elasticity is greater when the substitutes are more. This is because of the wider choices consumer has. The minimal changes in the price of one good will result immediate shift of the demand to the other good.

The elasticity for the broadly defined commodities tends to be more inelastic than the demand for specific commodities. This is because the specific products are demanded on the basis of the consumer’s tastes, preferences, likes, passion and need.

* Time factor: The time factor influences the character of the demand of the good. In general, the availability of time allows the consumer to pursue the substitutes, which eventually results in the decline of the demand for the good whose price has increased. In short time, the demand is more likely to be inelastic for the reason that the consumer will not be able to find the substitutes.

*Expenditure on the product: The amount spent by the consumer on a particular product determines the character of the demand elasticity of the product. The products on which the consumer spends fewer amounts are likely to be inelastic conversely the products on which the consumer spends large amount are likely to be elastic. This is because the slightest increase in their prices would have a great impact on the consumer’s budget.

2.1.7 Uses to the business: The own price elasticity is very much essential to the business to analyze the market and further to formulate the strategies to gain maximum benefit from the given situation. The price elasticity enables the firm to asses the relationship between the price of its product and the demand. The firm can be able to gauge the relationship between their products and other products in the market. This helps the firm to identify which are the competing products and complementing products.

The firm by assessing the price elasticity can be able to define fine price strategies, promotion strategies and as well can contemplate about the synergies with the other firms whose products are in complementary relationship with the firm’s products.

2.2 Income elasticity: A measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income.

EmQx, M Percentage change in quantity demanded %∆Qdx

= Percentage change in the consumer income = %∆M

If EmQx, M > 0, then X is a normal good, an increase in income leads to an increase in the consumption of X.

If EmQx, M < 0, then X is an inferior good, an increase in income leads to a decrease in the consumption of X.

2.2.1 Influencing factors: The important factors influencing this elasticity are the income level of the consumers and the nature of the product. If the product is not having the perceived value or not having the perceived image, the product will be purchased more when the income level of consumer decreases conversely the products will be purchased less when the income level of the consumer increases.

2.2.2 Uses: The firms will be able to identify their product’s perceived value. This assists the firms to modify their product’s features, promote well or position their product well in the market.

In general, the firms are interested in making their products a normal good, the demand increases with the increase in the income level of the consumer. This elasticity helps the firms to define their pricing strategy to suit the consumer’s perceived value.

2.3 Cross-price elasticity: A measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

EdQx, Py = Percentage change in quantity demanded of one good = %∆Qdx

Percentage change in price of related good %∆Py

This elasticity helps in understanding the relationship between two goods. This elasticity explains whether two goods are complement or substitute to each other.

If EdQx, Py > 0, the two goods are substitutes to each other, the larger the positive coefficient, the greater the substitutability between the two goods.

If EdQx, Py < 0, the two goods are complement to each other, the larger the negative coefficient, the greater the complementary relationship between the two goods.

The important point is the sign of the coefficient is important when mentioning the Cross-price elasticity.

2.3.1 Influencing factors: The close relationship between the products has a great impact on the elasticity. If the product has many competing or substitutes which offer similar benefits mix, the demand changes highly even with a minor changes in the price of the product or the changes in the price of the substitutes. This elasticity is also influenced by the price of the complementing products; if the price of the complementing products increases (decreases) the demand for the firm’s product decreases (increases).

2.3.2 Uses: This helps the firms to handle the competition by formulating a well defined pricing strategy. The firms will be able to assess the relationship with the other products. The firms can identify the competing as well complementing products in the market.

The demand of the product is highly influenced by the competing and contemplating product’s price. The firm by assessing the cross-price elasticity will be able to handle the competition and as well can form synergies with the firms offering complementary products. This will enable the firms to operate efficiently in the market.

2.4 Price elasticity of supply: The ratio of the percentage change in the quantity supplied of a product to the percentage change in its price.

Es = percentage change in quantity supply = %∆Qsx

percentage change in price %∆P

Es > 1, elastic supply, the percentage change in quantity supply is more than the percentage change in price.

Es < 1, inelastic supply, the percentage change in quantity supply is less than the percentage change in price.

Es = 1, unitary elastic, the percentage change in quantity supply is equal to the percentage change in price.

2.4 Influencing factors: The influencing factors are the price of the product, the nature of the market. The ultimate objective of the firm is to make maximum profits, the firm will supply according to the rise in price and demand in the market to gain optimum profits.

2.5 Uses: This elasticity helps the firms to strike a balance among the price of the product, demand and supply of the product. This also helps the firms to define their production and supply str0ategy so as to address the given situation.

Q.3.0) Read the New Economy Index dealing with the effects of internet and increased competition on business competition (http://www.neweconomyindex.org/section1_page06.html).

a. List factors that are said to be driving the increased competition between firms? Do these factors suggest that the structures of the markets in which firms operate are taking on more of the characteristics of the perfectly competitive market structures?

b. Is there information on these pages that gives an indication of whether increased competition is having an effect on the profitability of the firm?

Ans. a) The factors that are said to be driving the increased competition between the firms are:

i. Emergence of global market place.

ii. The number of increased firms.

iii. Technology that makes the entry easy for new entrants.

iv. Ever increasing from securities markets to increase shareholders value.

v. Frenetic atmosphere of mergers.

vi. Increased number of large institutional investors.

Yes, these factors suggest that the structures of the market are taking on more of the characteristics of the perfectly competition. The major characteristics are the increased number of firms, more number of players. The easy entry for the new entrants suggests that the market is not having any entry barriers.

b) Yes, the information on these pages indicates the effect of the competition on the profitability of the firms. The average price mark-up over the cost ration in manufacturing in United States had declined from about 19 percent in 1970 to 15 percent between 1980 and 1992.

Q.4.0) Evaluate the economic case for economic integration in either South Asia or ASEAN region (chose the region which you live). Will this be beneficial for your country? Why or why not?


I am from India and India is an active participant in South Asian regional development and welfare programs. The economic integration is an important factor influencing the prosperity of the nations worldwide. The economic integration is one most successful tool exploited by many countries to gain economic benefits and welfare.

The movement of South Asian countries; India, Pakistan, Bangladesh, Nepal, Sri Lanka, Bhutan and Maldives towards the economic integration in the South Asian region will be a big step towards their economic welfare.

The India has already signed Free Trade Agreement (FTA) with Thailand, one more similar agreement with Association of South East Asian Nations (ASEAN) and another trade agreement with Singapore in early next year. This is the initiative taken by India to bring close the nations of this part of the world and leap towards the economic integration.

The developed have already formed their Regional Trade Agreement (RTA) such as North American Free Trade Agreement, European Union accord. The South Asian countries must formulate a similar platform to present their argument with one consented voice and craft own free trade agreement to counter the growing competition from these countries.

According a world bank report the success of the RTA is that the RTA were successful in eliminating the trade barriers thus, paving way for the free flow of goods and services, which ultimately benefits the masses. The trade barriers segment the market, restricts the free flow of goods, service, investments, development schemes which call for a joint venture. Therefore wide range policy measures are required to facilitate the economic integration.

A direct shift from closed to open regionalism will enable the countries to operate in more liberal market. The increased relations between the nations allows the free flow of ideas, fosters alternative thinking and exchange of technology.

In a liberal trade regime, the South Asian countries will reap benefits in terms increased volume of trade, larger investments and increased production but, also the new technologies which were hitherto unknown at work place.

India, with a one fifth of worlds population has been successful in gearing the interaction between the South Asian countries, has a larger part to play and as well the biggest beneficiary from the economic integration in this region.

There are some competitive complications in the integrations. Most of the countries are having rivalry among them as they offer similar products to the international market. India and Sri Lank compete in agro-products; tea, coffee, rubber and jute, Malaysia and Singapore in clothing, Japan and South Korea in electronics.

At present the integration trade among SAARC is less than 5 percent, where as it is 55 percent in European Union countries and 65 percent in North American countries. The trade between India and Pakistan is currently at US$ 251; with the integration trade it would go up to US$ 4 billion.

Q.5.0) What is a market failure? What are the different types of market failures? Discuss and give an example.

Ans. The situation in which the following characteristics developed in the market is termed as Market failure.

The different types of market failures are

Market power


Public goods

Incomplete information

5.1 Market power: The ability of a firm to set its price above marginal cost. The main aim of the government is to create a perfect competition in the market. But, many a times it is not possible. There always exist some firms who have an advantage over the other firms operating in the same industry. These firms gain sustainable competitive advantage by having larger market share, high technology, competitive market position and/or financial support.

The firm which has sustainable competitive advantage will exercise power to influence the market prices. The firm will keep its price higher than the marginal cost, the resources required to produce that unit good, thus decreasing the social welfare. The government will intervene in these instances to regulate these firms to increase the social welfare.

When the firms exercise the market power, the social welfare will minimize, the consumer has to pay more than the cost incurred by the producer to produce that extra unit.

The government formulates certain laws to avert the concentration in the market, which eventually results in Market power. In most of the countries,
the governments formulate laws to control the formation of market power by legislating antitrust policy and price regulation.

Example: The formation of a monopoly is a clear case of market power. Most of the firms attempt to build a monopoly. In monopoly market, the entry is restricted and the firms can charge high price than the marginal cost.

In the above figure it shows the monopolist’s demand, marginal cost, and marginal cost and marginal revenue curves. In a perfect competitive market all the consumers are charged similar. But, in this case the monopolist charges PM price for the profit maximizing out put units of QM. At this price the consumer is pays higher amount for the last unit produced than the cost to produce it. Total social welfare in monopoly is the sum of producer and consumer surplus, the region W in the above figure. The triangle ABC represents the dead weight loss.

5.1.1 Antitrust policy: Government policies designed to keep firms from monopolizing their markets.

The main aim of the antitrust policy is to eliminate the dead weight loss and discourage the mangers to exercise price-fixing agreements and other collusive practices by declaring it as an illegal to foster monopoly.

The first successful antitrust act was used against United States and Trans-Missouri Freight Association agreement, which the Supreme Court declared as illegal.

Standard Oil of New Jersey along with Standard Oil of Ohio was charged with attempting to fix the prices of petroleum products and the prices at which the products would be shipped. Standard Oil, in particular, was accused of numerous activities designed to enhance monopoly.

5.1.2 Price regulation:

In many instances a single firm may be able to service the market or the government may wish to allow the firm to practice monopoly. When the economies of scale are larger, the government may allow the firm to practice monopoly but choose to regulate the price of the firm’s products.

Example: In India, the government has allowed the Maruti Udyog Ltd., au automobile manufacturing firm, to practice monopoly in small car segment till 1998. This was mainly to support this PSU, to gain the strength in the market and as was the capacity of the firm was made to address the demand of the market. Even though the Maruti was the only car manufacturer in the small car segment, the government has practiced strong price regulation in order to eliminate the dead weight loss.

Regulating a Monopolist’s price at the Socially Efficient Level

5.2 Externalities: Effects on the third party who is not the part in decision making process is termed as the Externalities. There are two types of externalities; positive externalities and negative externalities.

5.2.1 Positive externalities: The benefits are received by the party which is not involved in the production or consumption of a good.

Example: The benefits of the immunization of the public, which eventually leads to building a health society, benefits all the people irrespective of their participation in the process.

The government programs aiming at imparting education to every one leads to the building a knowledgeable society. This initiative benefits the whole nation.

5.2.2 Negative externalities: The costs borne by parties who are not involved in the production or consumption of a good.

Example: The pollution in the air, water and soil. The public in general suffers with out directly involving in the process. The society will be bearing some costs of this damage to the environment, but eventually the impact will on everyone.

5.2.3 The Clean Air Act: The Clean Air Act was formed to address the much devastating issue of the pollution. The new act covers the industry which releases over 10 tons per year of any of the listed pollutants or 25 tons per year of any combination of those pollutants.

The firms under this act are required to obtain permit to pollute. The permit is issued to the industry on the basis of its nature, level of pollution in that area and the calculated level of pollution that would be emitted by the firm at a fee. The act also supports the new entrants to find efficient ways to decrease the pollution in the industrial process.

The Act’s another important feature is, a firm can sell its limit to the other firm if the firm has lower level pollution than the permitted level. This is to encourage the firms to find the new ways to minimize the pollution in their firms.

5.3 Public goods: A good that is nonrival and nonexclusionary in consumption.

Public goods are the goods, which can be consumed by everyone. The goods are not paid by any one or the benefits are received by everyone. These benefits cannot be allocated to any single person; clean air, sunlight etc.

In general, if no one pays for these goods, as everyone along with the purchaser will be benefited. Thus, there is little or no major incentive for the purchaser. This very factor leads to free ride phenomenon.

5.3.1 Nonrival consumption: A good is nonrival in consumption if the consumption of the good by one person does not preclude other people from also consuming the good.

Example: street lights, public parks, radio signals, national defense.

5.3.2 Nonexclusionary consumption: A good or service is nonexclusionary if, once provided, no one can be excluded from consuming it.

Example: clean air, roads.

It would be advantageous for a firm to contribute to public goods in its market place to create goodwill in the market. The same thing goes with the individuals as well. The benefit arising from paying for the public good is not exclusive for any individual, thus everyone would be willing not to pay for them, which eventually results in failure of the market in providing public goods.

In conclusion, if the firm’s goal is to maximize profits, the last dollar spent on contributions to public projects should bring in one additional dollar in revenue.

5.4 Incomplete information:

The information about the product and services to all the interested parties is important for the market to operate efficiently. The participants must have good knowledge about the product or service’s features, price, benefits, the risks and the available technologies. The incomplete information will eventually result in inefficiencies in the market functioning, usage and the firm’s output.

The severe causes of market failure are asymmetric information, a situation where some market participants have better information than others. The presence of asymmetric information can lead buyers to refuse to purchase from sellers ort of fear that the seller is attempting to dump the product because it worth less than they are willing to pay and in some cases, may lead to the market collapse.

The government has formulated policies to address this issue.

5.4.1 Rules Against Insider Trading:

The regulation to avert the asymmetric information problem is by formulating rules against insider trading. The insiders will have more information about the company; can take better decisions about its stock trading. This if continues, the traders may reject the company’s shares. There will be little or no chance to the outsiders in the market which is dominated by the insiders; this will eventually result in market failure.

To prevent insider trading form destroying the market for financial assets, the government has enacted rules against insider trading. The regulation is in Section 16 of the Securities and Exchange Act (1934) and amended in1990 and effective form May 1, 1991.

Example: The manger has who has got a better knowledge about the company’s inside information may utilize to gain profits. If the company is contemplating to form a merger which would increase the value of the company, will buy the share in advance and sell them when actually the share value increase after the merger. Thus, gains maximum profits.

5.4.2 Certification: To eliminate the asymmetric information problems, the other devise is the certification. The government issues the certification of authenticity to the product or services after confirming to prescribe standards. This will ensure the consumers to get a fare deal in their transactions.

Example: The issue of certification of authenticity by the government to the schools, colleges, industries etc.

5.4.3 Truth in lending: The little or no comprehensive information about the barrowings has resulted in financial crisis across the world. The government has passes legislation on the barrowing and repaying criteria to simplify the issue, Truth in Lending Simplification Act (1980).

The truth in lending act affects both the supply and demand of credit. The barrowers have more information about the credit criteria, reduces the risk involved in repayment of the loan. The availability of information to the barrowers increases the demand, thus, the demand curve for the loans moves towards the right. The suppliers are affected mainly by the increased cost in complying with the government regulations, hence the supply curve of the loan moves towards the left. This movement eventually results in increase in the price of the loan (interest).

5.4.4 Truth in advertising: Advertisement is one of the important means of communicating with the potential and actual buyers. The main aim of the advertisement is to turn viewers into buyers. Under the pressure to push the product in the market, the companies will indulge in providing the false information or too much from too little truth.

When the consumers understand this, they will switch to competitor’s product or service. To alleviate this problem the government formulated the truth in advertisement. The main aim of this regulation is to cease the company’s from giving false information and to compensate the consumer who has incurred damages from a misguiding advertisement.

5.4.5 Enforcing contracts: Today’s markets are so dynamic, the relationships changes very quickly. In the attempt to gain the maximum benefit from a given situation, the companies become opportunists. To preserve the best interest of both parties the government has formed enforcing contracts regulation.

In most of the instances the end-of-period is a crucial thing. The firms often violate the contract principles to gain instant benefit from a changing situation with out due concern to the other party’s interest.

To solve this problem the government has formed Enforcing contracts, requires dishonest people to honor the terms of contracts.

5.4.6 Rent seeking: Selfishly motivated efforts to influence another party’s decision.

The government always intervenes into the market in order to avert the market failure. The government’s aim to intervene the market is to improve the allocation of resources in the economy by alleviating the problems associated with market power, externalities, public goods and incomplete information. The government policies benefits one party at the expense of other party.

For this reason the lobbyists send huge amount of money in attempts to influence government policies.

Q.6.0) Define CPI and Unemployment. What is the limitations/criticism of the following?

a. CPI as a measure of change in prices.

b. Unemployment rate as a measure of true employment.

Ans. 6.1) The inflation and deflation are the two vital determining factors of the macroeconomics.

Inflation: An increase in the general (average) price level of goods and services in the economy.

The inflation does not mean that all prices of all products in the economy rise during a given period. Inflation is an increase in the overall average level of prices and not an increase in the price of any specific product.

Deflation: A decrease in the general (average) price level of goods and service in the economy. In genera, the deflation is the reduction in the rate of inflation.

6.2 The Consumer Price Index (CPI):

An index that measure changes in the average prices of consumer goods and services.

The consumer price index is the widely accepted and used scale for measuring the inflation or deflation. The CPI is also called as the cost-of-living index. The CPI will measure the price changes in the consumer goods only. This measurement is considered with the effect of changes in the prices consumer goods on the income of the consumers.

In Australia, the Australian Bureau of Statistics (ABS) prepares the CPI. The ABS price collectors contact a sample of retail stores, other businesses supplying consumer products or services, home owners and tenants in Australia’s capital cities, each quarterly. The items included in the market basket are the items used or consumed by a typical urban family, under the category of food & beverage, clothing, housing expenses, transportation, medical care, entertainment and a range of other goods and services.

The composition of the market basket generally remains unchanged from one period to the next; hence the CPI is also called as fixed-price index.

Computing CPI:

CPI = Cost of the market basket of products at current year prices × 100

Cost of the same market basket of products at base-year prices

Base year: A year chosen as a reference pint for composition with some earlier or later year.

Annual rate of inflation= CPI in given year ─ CPI in previous year × 100

CPI in previous year

6.3 Limitation/criticism of CPI:

The CPI as a measure of change in prices has attracted much criticism because of its limitations. The reasons for the change in price are affluent, the computing of CPI does not consider all these factors as it would be difficult to collect and compile the data.

1. The CPI considers the items consumed by a typical urban family rather than the purchases of the consumers in every area. This very character limits the CPI to present a comprehensive measurement. Even in the family segment, the purchases of different families differ considerably from a typical family, the retired people have different buying criteria, purchases more of medicines and less of children products and the family who have more young children will have different needs.

2. The CPI does not acknowledge the changes in quality which in many instances results in the changes in the prices. Generally, the improving quality or performance of a product costs more to the producer, thus the producer will increase the price, the CPI fails to acknowledge this very fact. The price of television has increased quite highly, but the quality of the picture, sound and the added features are also the new benefits of today’s televisions, the CPI will not take these factors into consideration.

3. The composition of the market basket most of times is unchanged, which results in ignoring the latest trends. The market is more dynamic than ever and every year there are many new and innovative products and service are introduced to the market. The failure to take the changing patterns and preferences, the CPI will not be a comprehensive measure of the change in prices.

b) It is very important for every country to assess the unemployment rate. The countries most important and valuable asset is its labor force. The government has to gauge the productivity of its employment force to develop the country.

6.4 Unemployment rate: The percentage of people in the labor force who are without jobs and are actively seeding jobs. The unemployment is not all the people who do not have jobs, but the people who are part of the labor force who do not have jobs or seeking jobs.

6.5 Civilian labor force: The number of people 15 years of age and older who are employed or who are actively seeking a job, excluding those in the armed forced, home makers, students, discouraged workers and other persons not in the labor force.

6.6 Limitations/criticism:

The calculation of Unemployment rate has attracted much criticism for limitations to give a comprehensive detail of the employment.

The Australian Bureau of Statistics (ABS) computes the unemployment rate in Australia.

1. False response to the ABS survey about the unemployment. The respondents may give false information about their employment. The respondents may give false information about their current position; they might say they are seeking a job even if they are not or employed in illegal activities. This could be because of the benefits of registering oneself as unemployed or job seekers.

2. The official definition of the unemployment understates the unemployment rate by not considering the discouraged workers.

Discouraged worker: A person who wants to work, but who has given up searching for work because he or she believes there will be no job offers. After repeated rejections, discouraged workers often turn to their families, friends and possibly other forms of welfare for support. The ABS counts a discouraged worker as anyone who has looked for work within the last six months, but responds that they no longer looking for a job and includes in ‘not in labor’ category. The number of discouraged workers is likely to rise during a recession; the degree of underestimation of the official unemployment rate is thought to increase during a downturn.

3. Another understating of the unemployment rate occurs because the survey treats the part time workers equal to the full time workers. Some of these part time workers might be willing to go for full time job given a chance. These latter workers are underemployed. Such under-utilization of the employees is great in recession, but is not reflected in the measured unemployment rate.

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