Business Economics Economy Unemployment

Question: 1. why is unemployment a key factor for the prosperity of the economy? Is structural unemployment an important part of it? Give at least two examples. 2. Identify the key factors affecting the demand and supply for currency. How is international trade affected by changes in the demand and supply for currency? 3. What is the difference between the Government expenditure multiplier and the tax multiplier? What is more preferable for an economy? 4. Define price elasticity of demand. What is the importance for the Business Environment? Give two examples of an inferior goods.? 5. What is opportunity cost? How does opportunity cost affect decision making? Give at least two examples of opportunity cost. ? Answer: 1: In any economy unemployment is viewed as a critical issue that affects the economy to a large extent. The situation of unemployment is likely to arise when an individual is without a job or is seeking one. The economys prosperity gets affected with percentages of unemployment. The government in the country is likely to suffer as it has to provide benefits to the people. The longer the period unemployment is more likely that the government has to shell out more money. The spending of the unemployed individual is likely fall as there is no way of earning any income and the savings also falls. By structural unemployment, we mean there is no match of the skills that is possessed by the worker in an economy and the demand in skills by the employers. This is a very important factor in case of unemployment. This as a result does not solve the unemployment situation in the economy. We have seen in the decades that the industry of manufacturing in United States has fallen. The gap is filled by the information and service industry. The skills required for manufacturing is not similar to that of the service and information industry. As a result the people with manufacturing skills leave the country. A similar case is observed in the textile industry where it used handloom for production. With industrial revolution it was then replaced by machine and required skilled labours and the artisan and weavers lost employment. 2: The factors that affect the demand and supply of currency are mainly due to the following factors: Spending by the consumers: The consumers are likely to spend more when there is any occasion such as Christmas for making purchases. They are likely to liquefy the bonds and the stocks this result in more demand for money. Motives that are precautionary: There may arise a situation where the people might require money in the immediate future. This will result in demand for money. The supply of money is affected by the policies that are adopted by the Central Bank. By international trade we mean the exports and the imports of a country. A case can be represented to show how the changes in the currency affect exports as well as imports. Suppose a owner has chain of stores and is willing to purchase goods from a Chinese company then a check in American dollar is not accepted by the Chinese company. The company then has to go to the foreign exchange to get Chinese currency for American dollar. When US dollars are strong then the imports get cheaper. The imported goods demanded increases and the demand and supply of currency also increases. 3: Though there are some differences in the government tax multiplier and the expenditure multiplier but they are linked to actions of fiscal policy and the output generated in the economy. The tax multiplier measures how much the consumer is willing to spend when taxes are lowered by the government. When there is a tax cut then the spending of the consumer and the disposable income is seen to increase. The consumers are seen to save a part of the income and the rest is used for purchases. The expenditure multiplier refers to the spending by the government and effect of it on the economy. If spending is increased by the government, the money enters into the economy where the consumer saves and spends. Both the multiplier uses MPC in its calculation. The expenditure multiplier is more effective than a tax multiplier because the decreased and the increased spending by government affects the economy more than a tax multiplier. 4: A measure of the relationship between changes in the quantity demanded of a particular good and a change in its price is known as own price elasticity of demand . The sensitivity of prices is reflected from the own price elasticity of demand. The product is elastic when a very little change in prices causes a huge change in the demand for quantity, while the product is inelastic when there is a large change in the prices leading to very insignificant changes in the demand for the commodity. Price elasticity of demand can be used by the companies for the setting of price policies. With the optimum policy of pricing the owner can gain profit through charging the amount that the market can bear. By inferior goods we mean the demand for the goods that is likely to fall with the increase in income of a person. When we are speaking of inferiority of a product we actually relate to the affordability and the behaviour of the product it does not pertain anything that is related to the quality. An example of the inferior good is cheap cars and cheap coffee. In the earlier years we have noticed that the income of the people was generally low to satisfy the transportation needs. They could only afford cheap cars and avoided buying the luxury ones. This was a type of inferior good for the consumers with transportation needs. In case of coffee, a person with lower income is satisfied with inferior quality coffee than an expensive coffee bag from star bucks. 5: The term opportunity cost means that the alternative cost that needs to be forgone so that a certain thing can be pursued. In other words it is the advantages that one receives by undertaking another action. The economic decision making is seen to be directly linked to the opportunity cost. When we consider the personal finances the main thing that is considered is the opportunity cost. They have to evaluate the products value that is forgone to obtain the other product. This is done because they need to pay for the product according to the same budget. This decision choice depends on the opportunity cost of a product and the alternative. The examples of opportunity cost are: A person who stops going to watch a movie in the movie hall for fetching higher grades in the test. The opportunity cost is the cost of enjoying the movie. Suppose there are two flavours in the ice cream parlour i.e. strawberry and chocolate. If someone chooses chocolate then the opportunity cost is the enjoyment of strawberry.