Download Textbook Chapter 4 (pages 43-53)

Chapter 3
Circles and Cycles
I.
Measuring Economic Activity (more detailed info in your Economics class)
A.
Gross Domestic Product – the total dollar VALUE of all G&S
PRODUCED (may be sitting in a warehouse) by a country in one
year. It does not accurately measure the welfare or well-being of a
population.
REAL GDP – GDP adjusted for INFLATION
What is INFLATION? – Occurs when people are spending money &
are confident in the economy
 Suppliers RAISE prices on G&S
 Prices are increasing FASTER than the increase in people’s
paychecks!
 Might occur more frequently during a recovery & prosperity
period
GDP figures do NOT include:
 Unsold services (child care, meals, auto maintenance, etc.)
 Value of leisure time
 Illegal production & trade (underground economy)
B.
Employment – the number of people who are employed during a
given time. Usually reported as rates of unemployment.
 A high unemployment is bad; we want everyone working so
we desire a LOW unemployment
C.
Inflation – a period of increased spending that causes rapid rises in
prices.
D.
Productivity – the output [of G&S] produced per unit of input
(natural, human & capital resources). It is a measure of the
efficiency of production, not the number of units produced.
 Production – number of units we make
 Productivity – is how profitable we are
II.
Circles & Cycles of Economic Activity
A.
The Business Cycle (Cycles of the Economy)
(4 Stages)
1.
Prosperity – a period when consumers earn lots of money &
are spending it! Demand for G&S is at its highest point;
Production is at its highest point, unemployment is at its lowest
point (lots of people are working)
2.
Recession – a period of decline; when spending falls,
demand for products falls, production of goods slow down;
layoffs occur
 We had a GREAT RECESSION in 2008
3.
Depression – the lowest point a cycle can reach;
high unemployment, money to spend on needs is limited,
production almost stops, businesses close down
 We had a GREAT DEPRESSION in 1929 to early 30’s
4.
B.
Recovery – the business cycle is on an
upswing; people start to find jobs & spend $$ on G&S
The Life Cycle of a Product
1.
Introduction Phase – product is placed on the market and is
NEW; may be considered a FAD; the COMPANY is already in
DEBT due to the initial start-up costs of making the product
eg. Hoverboards & latest versions of a cell phone
DECIDE on which strategy to take when setting your prices:
a.
OR
Price skimming – charge a HIGH price to recover costs
& maximize profits quickly! Then drop the price when the
product is no longer unique (Shopping at Heinen’s)
b.
2.
Penetration pricing – Charge a LOW price (just enough
to pay for its “unit costs” to gain many buyers of the
product! (Shopping at Marc’s)
Growth Phase – sales & profits increase (unit costs are
decreasing) & competitors appear, many stores are starting to
sell the product
eg. Knock-off hoverboard (caught fire); Version 6 cell phone
PRICE SKIMMERS: start to lower the prices to gain more
customers
PRICE PENETRATORS: make minor price changes, just
promote (advertise) more
3.
Mature Phase – sales level off & profits begin to decrease;
the popularity of the product is starting to diminish; must put
the product “on sale” for lower prices;
eg. Summer products; Cavs championship attire
What should a company do during this stage?
 Start to invest in R&D – go back to the “lab” to figure out
how to tweak your product to make it better
 Keep in mind that you are going into debt
(expenses are increasing)
 Start to expand in different “markets” – what does this
mean? Taking it to different stores, different cities,
different countries . . .
4.
Declining Phase – product is no longer profitable & producer
stops making it; it’s OUTDATED! Prices are at their lowest
point; product is being phased out on the stores’ shelves; the
product is becoming obsolete!
eg. Selfie sticks, DVD & video stores
What should a company do during this stage?
 Stop spending money on advertising (marketing)
 Try to clear out your inventory! – what does this mean?
_________________________________________
C.
III.
The Circular Flow – please get a copy of this for the notes!!
The Role of Government (more on this in Econ class)
They try to regulate the business cycle. To keep it at the prosperity level
as long as possible. They try to keep inflation down.
How do they do this???
They establish specific policies
 Reduce government spending
 Provide more money for people to spend by providing
employment & adjusting interest rates!
 Cut OR increase taxes