Page 16 - DECO405_MANAGERIAL_ECONOMICS

Unit 1: Introduction to Managerial Economics

Notes
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Caution A recession is defined as a period of two or more successive quarters of decreasing
production. Production is measured by a number of variables. Real Gross Domestic Product
is one important measure. We will focus mainly on it.

But why do economists regard a recession as a problem?

It is not self-evident that a drop in production is a bad thing. For example, it might be that people
want to enjoy more leisure, and spend less time producing goods and services. If production
dropped for that reason, we would have no reason to think of it as an economic problem.
But, in some periods of recession, we have evidence that this was not what happened. In many
recession periods, businesses that announced they were hiring had long lines of people who
wanted to apply, with many more people than they could hire. This suggests that the people
standing in line for a job had more leisure than they wanted, and would have preferred jobs and
income to buy more goods and services. In the 1930's, some people sold apples or pencils in the
street to get a little income, typically much less than they would have had in their old jobs.
Again, this suggests that people had too much leisure and would have preferred more work and
income. If this is so, then it seems that something was going wrong. In different terms, it seemed
that the recession had caused unemployment.

Another possibility is that production might drop because a war or disaster had destroyed
factories and other capital goods. But, in 1933, it seems very unlikely that the productive capacity
of the economy could have dropped by 30%. There had been no war. And in fact, factories had
been closed that could have been reopened and put to work, at the same time as many people
were looking for work. Perhaps these circumstances show why the recession is regarded as a
major economic problem.

Did u know? In which year "The Great Depression" occurred? It was in 1930.

1.6.2 Unemployment

Our second macroeconomic problem is unemployment. This problem is highly correlated with
recession, but is distinct, and we need to look at it in its own terms. Unemployment occurs when
a person is available to work and currently seeking work, but the person is without work. The
prevalence of unemployment is usually measured using the unemployment rate, which is defined
as the percentage of those in the labor force who are unemployed.
Economists distinguish between various types of unemployment. For example, cyclical, frictional,
structural and classical, seasonal, hardcore and hidden. Real-world unemployment may combine
different types. The magnitude of each of these is difficult to measure, partly because they
overlap.
Unemployment is a status in which individuals are without job and are seeking a job. It is one of
the most pressing problems of any economy especially the underdeveloped ones. This has
macroeconomic implications too some of which are discussed below:
1. Reduction in the Output: The unemployed workforce could be utilized for the production
of goods and services. Since they are not doing so, the economy is losing out on its output.
2. Reduction in Tax Revenue: Since income tax is an important part of the revenue for the
government. The unemployed are unable to earn, the government loses out on the income
tax revenue.

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