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law of increasing costs. an economic principle which states that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service. What is economics? Learn with flashcards, games, and more — for free.
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a theory or simplified representation that helps explain and predict economic behavior in the real world. Just the definition of economic vocabulary Learn with flashcards, games, and more — for free.
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Mar 22, 2021 · Opportunity cost is the cost of missing out on the next best alternative. In other words, opportunity cost represents the benefits that could have been gained by taking a different decision. All businesses have to make choices - and those choices have implications.
- Overview
- Lesson overview
- The labor force participation rate (LFPR)
- Limitations of the unemployment rate
- Three types of unemployment
- The natural rate of unemployment
- Changes in the natural rate of unemployment (NRU)
- The labor force:
- The unemployment rate (UR)
- Common Misperceptions
In this lesson summary review and remind yourself of the key terms and calculations used in measuring unemployment, the labor force, the unemployment rate, the labor force participation rate, and the natural rate of unemployment. Topics include cyclical, seasonal, frictional, and structural unemployment.
Lesson overview
A country’s economic performance is measured using three key indicators, one of which is the unemployment rate. When adults who are willing and able to work cannot find a job, it may be a sign that an economy is producing less than it could. On the other hand, unemployment is also a natural phenomenon that even healthy economies experience. While the official unemployment rate is helpful in representing the state of a nation’s workforce, it does have some shortcomings that should be considered, such as excluding discouraged workers.
There are three types of unemployment that economists describe: frictional, structural, and cyclical. During recessions and expansions, the amount of cylical unemployment changes. Cyclical unemployment is closely related to the business cycle, and causes the deviations of the current rate of unemployment away from the natural rate of unemployment.
Key Terms
Key takeaways
A country’s economic performance is measured using three key indicators, one of which is the unemployment rate. When adults who are willing and able to work cannot find a job, it may be a sign that an economy is producing less than it could. On the other hand, unemployment is also a natural phenomenon that even healthy economies experience. While the official unemployment rate is helpful in representing the state of a nation’s workforce, it does have some shortcomings that should be considered, such as excluding discouraged workers.
There are three types of unemployment that economists describe: frictional, structural, and cyclical. During recessions and expansions, the amount of cylical unemployment changes. Cyclical unemployment is closely related to the business cycle, and causes the deviations of the current rate of unemployment away from the natural rate of unemployment.
The labor force participation rate (LFPR) is another measure of labor market activity in the economy. The LFPR is the percentage of the adult population that is in the labor force. The labor force includes everyone who is either employed or unemployed. The adult population is defined as anyone who is over the age of 16 who potentially could be part of the labor force. Anyone who is less than 16 years old, is in the military, or is institutionalized is not considered to be potentially part of the labor force and is excluded from this calculation.
When people enter the labor force the LFPR increases, and when people exit the labor force the LFPR decreases. A decrease in the LFPR that occurs at the same time as a decrease in the unemployment rate can signal that there are more discouraged workers.
The unemployment rate as it is measured officially is often criticized for understating the level of joblessness because it excludes anyone working at all or people who aren’t looking for work. In particular, the official unemployment rate leaves out discouraged workers and the underemployed. People who have given up looking for work because they a...
Economists primarily focus on three types of unemployment: cyclical, frictional, and structural. Cyclical unemployment is the unemployment associated with the ups and downs of the business cycle. During recessions, cyclical unemployment increases and drives up the unemployment rate. During expansions, cyclical unemployment decreases and drives down the unemployment rate.
[Cyclical unemployment seems pretty important, can you tell me more about it?]
The natural rate of unemployment (NRU) is the unemployment rate that exists when the economy produces full-employment real output. NRU is equal to the sum of frictional and structural unemployment. When an economy is producing an efficient amount of output (meaning it is operating on its PPC), the unemployment rate will be equal to the natural rate of unemployment. Even though an economy may be operating efficiently, there will still be some unemployment. Because of that, the natural rate of unemployment is never equal to zero.
[Can you tell me more about the two components of the natural rate of unemployment?]
The natural rate of unemployment (NRU) can gradually change over time due to events such as changes in labor force characteristics. The NRU can change due to changes in structural and frictional unemployment. For example, a firm may want to hire fewer workers because the skills of those workers are not needed as much as they used to be. That will c...
The labor force is made up of the number of people unemployed and the number of people employed:
LF=# Unemployed+# Employed
The unemployment rate is the percentage the labor force that is unemployed.
UR=# Unemployed# in Labor Force×100%
•Not everyone who is out of work is unemployed. In order to be counted as unemployed you have to be out of work, looking for work, and able to accept a job if one is offered to you. If you are out of work and not looking, then you are considered “not in the labor force” rather than unemployed.
•We tend to think of unemployment as an undesirable thing, but a certain amount of unemployment is actually part of a healthy economy. Structural unemployment occurs when new industries are created and old industries become obsolete. For example, when we moved from using horses and buggies to using cars to get around, this put a lot of buggy makers in the structurally unemployed category.
•Frictional unemployment might not seem very fun, but consider what it means to have zero unemployment—nobody ever looks for a job, they just remain in whatever job they are given! In fact, a number of dystopian novels have been written in which everyone in a society is automatically assigned a fixed career (such as the Divergent series). Those societies have zero frictional unemployment, but they are also quite unpleasant if you are unhappy with that career!
•A decrease in the unemployment rate isn’t necessarily a sign of an improving economy. When people stop looking for jobs and drop out of the labor force as discouraged workers, the unemployment rate will decrease even though the true employment situation hasn’t gotten any better. This is why it is important to look at both changes in the unemployment rate and changes in the labor force participation rate. Looking at both changes let’s you get a more complete idea about changes in the employment situation.
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Jan 4, 2022 · Economic efficiency - key concepts to revise. Allocative efficiency: When scarce resources are allocated according to consumer preferences at a price equal to marginal cost. Productive efficiency: When a firm is operating at the lowest point of their average cost curve in the short or the long run.
