Wen Guang Li
SSE103.8756
Dr. Ermelinda Laho
July 22, 2009
Take-home Assigment
Outline: 1, Firms fall into difficult situation cause to high unemployment rate reasons.
2, Reduction in people’s income influences their consumption expenditures.
In 2008, the economic crisis made the United States experience a lot of difficult
issues. Many famous companies ran into difficulties and had to face severe losses,
even bankruptcy. For example, the prominent securities firm, Lehman Brothers, filed
for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer,
and Merrill Lynch sold itself to Bank of America. Last month, General Motors’
100-year history, filed for bankruptcy. Therefore, when firms fall into crisis, they are
always forced to cut staff or reduce staff’s working time. It will directly cause to a
high unemployment rate and reduce people’s incomes.
“The American economy lost 467,000 more jobs in June, and the unemployment rate edged
up to 9.5 percent in a sobering indication that the longest recession since the 1930s had yet to
release its hold” (Goodman, 2009)-The unemployment rate edged up to 9.5%.
In other world, most firms still struggle against difficult situations. Firms
produce goods and service and sell to customers to make profits. However, under
economic crisis, customers have to reduce or change their demand for economic
goods. It causes to demand is down in the Unites State. When firms fall into a dip in
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their sales performance, it will directly decreases firms’ profits or arise huge losses.
Firms have to reduce to use resources to produce goods or provide service to save
expenses and keep firms run. In addition, labor is one of the important resources, and
employees’ salary expense is a big part of the firms’ expense. Therefore, in order to
shrink their production activities, to lay off employees become one of the most usual
methods. We can figure out almost all firms have their staff reduction plans. One
small restaurant, it needed three chiefs in kitchen becuase it could earn about two
thousands a day before. However, now, it only can earn about one thousand dollar a
day because customers reduce a lot. Natually, this resaurant has to lay off one chief to
redurce salary expense. Using below graph to illustrate. When market for restaurant
services where there is a reduction in demand, the demand curve for restaurnat
services will shift to left&down, and the market for factors of production like chefs
where there is a lower demand as well, its demand curve also will shift to left&down.
For General Motors’ firm, it filed for bankruptcy has some important reasons,
espcially economic crisis leads to a big plunge in auto sales in America and General
Motors’ firm continues to keep not cutting employees and keep paying high welfare
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for employees. Finally, huge loss made General Motor be hit deeply and was forced to
fill for bankruptcy under many kinds of pressures. A coulpe of day ago, New General
Motors firm was established. It expects to have 64,000 American employees by the
end of this year, compared with 91,000 at the end of last year. In other word, over
25,000 emplyees lost their jobs. We can figure in order to survive in the economic
recession, firms shrink their production activities. Therefore, firmsl always are forced
to cut employees. If economic crisis does not alleviate, it will keep high
unemployment rate.
“The average workweek for rank-and-file employees in the private sector — roughly 80
percent of the work force — slipped by a fraction to 33 hours, the lowest level since the
government began tracking such data in 1964” (Goodman, 2009).
For American people, their incomes are less than before; because the economic
crisis reduces their work time even makes them lose jobs. Normally, when people’s
income increase, their consumption expenditures increase, they are positive
relationship. Therefore, even though scarcity indicates people are desire to purchase
everythings they want to satisfy their unlimited wants, when they incomes reduce,
they have to make choices to save their expenses. Before, they had abilities often buy
their normal goods that it for which demand deceases as income decrease; however,
now, they choose to buy inferior goods that it for which demand increase as income
decrease. Therefore, reduction in people’s incomes has changed people’ consumption
expenditures habits.
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Many people like Startbuck coffee and food. When they have good and steady
incomes, they will often drink cups of Startbuck’s coffee and eat some Startbuck’s
food. When economic crisis make people incomes reduce, they will be very sensitived
to the goods’ price.Because Startbuck coffee and food isn’t cheap, in order to save
expenses, they have to reduce to consume Startbuck’s coffee and food. Therefore,
Startbuck coffee and food are normal goods to many people. In 2008, Starbuck’s net
income reduces more than 50%. Using demand curve to analysis price and quantity of
Starkbuck’s regular coffee, when people reduce buying Starbuck’s regular coffee, it
causes demand cruve shift to lefe & down. In other words, it makes Starbuck’s profits
reduce. Therefore, reduction in people’s income, it will make them reduce to consume
their normal goods and give big hit to those firms. Actually, when people’s incomes
reduce, in order to save money, more and more people choose to buy fast food which
have cheap price. So, fast food is inferior goods to them. For example, “Consumers
worldwide who are watching their spending bought more burgers and chicken
breakfast biscuits at McDonald’s in October, 2008, leading to a big rise in sales at
established locations for the fast-food leader” (Press,2008). We can figure out, people
in order to reduce expenses, more often, they choose to buy McDonald’s food which
as inferior goods. Therefore, in the recession economy, McDonald’s always can make
more profit when people income reudces.
It seems that this economic crisis does not alleviate so far. In order to pull
through, most firms have laid off their employees and reduced produced goods and
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provided services. Base on reduction in incomes and high unemploymnet rate, people
also have changed their consumption habits to save money. Naturally, the economic
crisis will be end in the future. When the economy recovers, those difficult situations
will be over. Firms will hire more employees to increase production activites. People
will have abilities to choose more economic goods that they want. Base on
microeconomic knowledge, this is what I learn for the issues of the high
unemployment rate and reduction in people’s income.
Works Cited
Goodman, Peter. “Joblessness Hits 9.5%, Deflating Recovery Hopes.” NYtime.com. 2
July. 2009. Web. 12 July. 2009.
Mayhard, Micheline. “A Primer on the New General Motors.” NYtime.com. 10 July.
2009. Web. 12 July. 2009.
Press, Associated. “Mcdonald’s Reports Big sales Growth for October.” NYtime.com
10 Nov. 2008. Web. 12 July. 2009.
Sorkin, Andrew. “Lehman Files for Bankruptc; Merril Is Sold.” NYtime.com. 14 Sep.
2008. Web. 12 July. 2009.
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