Tutor profile: Valentinas R.
You find out that your friend is selling t-shirts online and is making an economic profit. You saw and learned how he does it and you think that you can do that as well. However, what will happen if more people decide to copy and join the market for t-shirts? What will happen to yours and your friend's economic profits? Assume that there exists perfect competition and everyone has the same technology.
This is a standard supply and demand question. If your friend is making an economic profit, it means you can be better off if you went to do the same thing. However, as more and more people start selling t-shirts, the supply increases (shifts to the right). As this happens, the price of the t-shirts goes down. This is easy to show: imagine your friend was selling a t-shirt for $15. When you entered the market you want to steal his sales so you set the price for $14 and when others come, they set the price to steal from you at $13 and so on until the price reaches the cost of producing the t-shirt and no one is making any economic profits. Thus, in the case of perfect competition, no one is able to make economic profits in the long run. This result is in contrast to what happens with monopolies or oligopolies where persistent economic profits exist but this is for another lesson.
Imagine that you live in a quiet neighborhood and one day the next door building is reconstructed to be a bar. How would you feel about it? How do economists call this effect for you? What if a public park was constructed by your house instead?
Having a quiet neighborhood is something that families cherish. It is nice to be able to relax, not hear any noise of the city, any cars or businesses, and be able to know that it is safe for kids to play outside any time of the day. However, if a bar opens next door, all of this changes, it is possibly less safe, much louder, especially at night, more traffic and more crowded in the area. Even though you did not do anything, your living circumstances have changed. Economists call this - an externality. When your neighbor sells his house to a firm which builds a bar and brings many loud customers, this has a profound effect on you but you and your wishes are not accounted for, it is an externality. A side effect of an economic activity that has an effect on a third party not directly involved and not reflected in the cost is an externality. Now, if you want to sell your house, you will probably have to sell for much less because no one will want to buy a house next to a bar. On the other hand, if the city government decides to build a park next to your house, you will benefit from the positive externality. Your house value will increase, and it will be nicer to live there as a side effect of building a park. There are many externalities, both positive and negative. To find out if something is an externality just consider if a certain economic activity will have a side effect to someone not involved and will not be considered in the pricing. To combat externalities, governments usually step by setting rules and regulations.
The unemployment rate in the US is just over 4% in 2017 but many economists warn us to be wary of this number. What sources of unemployment exist? Why can someone who does not have a job, not be unemployed? Why is 4% not the number we should be focused on?
To begin with, the unemployment rate is a more complex issue than it might sound. As all nations are fascinated by it and every administration tries to lower the rate, we first must understand what it really is and where it comes from. There are a few sources of unemployment. (1) Frictional unemployment occurs when employees are between jobs looking for a position that matches the skills. It is sort of matching of the right employees and the right jobs. (2) Structural unemployment occurs when there is a mismatch between what skills the employers need and what actual skills the employees have. So say if many acquire coal mining skills but there is almost no demand for them, and instead of a high demand for workers in renewable energy, there will be structural unemployment because those with coal mining skills will not be able to get jobs - their skills do not match what industry needs. (3) Cyclical unemployment occurs due to the business cycle. With the boom/peak of the business cycle of the economy the unemployment will be lower and during the busts/throughs, it will be higher. (4) Seasonal unemployment relates to the time of the year. Ice cream sales in summer are high and so is the employment but in the winter these jobs disappear. Thus, this category includes jobs that depend on the season. However, to be considered unemployed one must be looking for a job. If John decides he does not want to work and decides to take care of his health, starts working out all day, then he is not unemployed but rather not in the labor force. Only individuals who do not have a job and are looking for one are considered unemployed. Lastly, some get discouraged after long unsuccessful job search and quit the search. Such individuals are considered as discouraged workers. They would want to work but they have given up hope to find it. While others are underemployed - working part-time or in jobs that do not use their best skills. Due to discouraged workers and underemployment, the unemployment rate is lower than it would be, thus many suggest we should be wary of the official unemployment rate.
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