2.00 Understand operations, economics, and professional development. 2.01 Maintain work flow to enhance productivity (Organize and prioritize work ).
a. Discuss benefits of organizing and prioritizing one’s work. • Knowing how to prioritize work effectively reduces stress and means you feel on top of things. You do what matters, when it matters. • You only need to list things that (a) you want to do but (b) could forget. So, for example, you probably don’t need to remind yourself to have lunch.
b. Explain the need to understand work assignments and responsibilities before organizing and prioritizing that work. • The first step is organization - so you'll know what your working with and what your tasks are along with any deadlines you have. Then you can figure out which are most important and demand the majority of your attention and energy.
c. Identify factors to consider when organizing and prioritizing work (e.g., time and other resource constraints; expectations of clients, co-workers, and managers; etc.). • Start by prioritizing only those things that are deadline driven • Everything else? Give it equal value and do it according to where you are and how you feel. This gives you a real sense of freedom and flexibility when it comes to the moment of choice. • Consider time constraints - what absolutely needs to get done today and what can wait until tomorrow or next week. • Consider people constraints - all things equal, move things that other people are waiting on to the top of the list. If you know that your manager can't finish his proposal without your part, that's more important than the thing that you always do on Wednesday that could just as well be done on Thursday. • Consider the consequences - are you going to get fired if you don't do something? Is another task going to give you the inside track on that promotion? Those things should be more important than mildly inconveniencing the sales manager by responding to their email a day late.
d. Discuss ways in which an individual’s physical environment impacts his/her ability to organize and prioritize work. • Ever look at all the work on your desk and feel overwhelmed? Do you have trouble locating important papers? Do you find yourself trying to remember what you were doing and what you're supposed to do next? • First, assemble all of your work in one place. You may discover that it's strewn between the office, home, your car, and other coworker's desks. • Important tools include a day planner/calendar and post-it notes or a scratch pad. • Begin creating file folders and computers folders. Being organized is half the battle. Use your list to create folders. Once all your paperwork is delegated to its appropriate place, the clutter will stop draining your energy.
e. Describe methods used to organize and prioritize work (e.g., developing a written list of tasks, breaking work assignments down into smaller tasks, e.g.). • Create a daily, weekly, and monthly task chart for yourself. • Note any and all deadlines or quotas. Now break down those deadlines and quotas into weekly and daily goals. • Determine which is the utmost important and assign it the number one. Work your way through until all of your tasks have been assigned a numerical importance.
2.01 Maintain work flow to enhance productivity. Coordinate work with that of team members (OP:230)
a. Describe ways in which an organization benefits when its team members coordinate work with each other (e.g., higher-functioning team members, stronger team results, etc.). • The major impetus for organizations to embrace the team concept is the effort to improve productivity and quality. • Some of an organization's major benefits from the use of teams are improved quality of work life for employees, reduced absenteeism and turnover, increased innovation, and improved organizational adaptability and flexibility. Effective implementation of teams can also improve office politics by improving the communication and trust between the team members.
b. Discuss the role of communication when coordinating work among team members. • Team members must have a clear picture of their roles and responsibilities with respect to the project and deliver accordingly. • All this is possible only when a team develops and practices effective communication skills. • Communication ensures that work is not duplicated; allows individuals to gain insights, assistance, and agreement from team members; helps team members to focus on common goal; etc.
c. Explain methods to coordinate work with that of team members. • If you are working on a new team, be aware that the total time involved in the project will be greater than if you were working with an established team. • The coordination time will be much greater, even if the task time is pretty much the same. • You'll have to talk it out, and you'll need to do a lot of talking and sharing. • This need to coordinate the work will also apply with an established team that is working on a task variant that is different for the team. • If you are working on an established team, where the task is one that the team members have collectively done before, it is fair to expect that the coordination time will be minimal.
Student Activity: • 2.01-1- f. Demonstrate techniques used to organize and prioritize work. • Ask each student to read the “how-to” article How to Prioritize Your Work at http://ezinearticles.com/?How-to-Prioritize-Your-Work&id=219970 and follow the steps provided to develop an organized, prioritized list of the tasks and responsibilities that s/he must complete in the coming week. These tasks and responsibilities could include schoolwork, work duties, extra-curricular and/or co curricular work, household chores, etc. Then, students should discuss their lists with partners and explain how they determined which tasks and responsibilities would take priority. • 2.01-d-d. Demonstrate methods to coordinate work with that of team members. • Ask students to work in pairs to identify activities that require people to work in teams. (Encourage students to think of the groups that they are part of, either in or outside of school.) These activities could include classes, sports teams, musical groups, CTSOs and other organizations, scout troops, work, etc. After identifying these activities/groups, partners should work together to develop a list of the methods that these teams use to coordinate their work as well as the ways in which the organization benefits when its team members coordinate their work. After sharing these findings, the class should discuss how these methods to coordinate team work can be used in the workplace.
2.02 Acquire knowledge of the impact of government on business activities to make informed economic decisions.
a. Define the following terms: tax, revenue, expenditure, excise tax, income tax, property tax, and sales tax. Define the term tax: • Legally mandated payment to the government that is not made in exchange for a good or service • Examples: income tax, sales tax, property tax, excise tax • Taxes are used to fund projects that benefit society. Define the term income tax: • Tax that is based on the amount of money a person earns or receives Define the term sales tax: • Tax placed on the retail sale of almost all goods purchased • Certain types of goods (i.e., food, medicine) are sometimes excluded from sales tax. Define the term excise tax: • Tax placed on a specific good • Excise taxes can be used to discourage consumption of a product or to raise some easy money on products that the government knows people will continue to purchase, regardless of the tax. • Example: gasoline tax, cigarette tax, beer and liquor tax Define the term property tax: • Tax placed on real estate, and in some cases, on personal possessions (e.g., boats, vehicles, etc.) Define the term revenue: • Income Define the term expenditure. • Money paid out; spending • The term “government expenditures” is often used to refer to spending by the government sector.
b. Explain the importance of taxes in a market economy. • Taxes are the primary source of revenue for the government sector. • In a market economy, some services such as national defense, roads, and education can be more efficiently produced by the government instead of private individuals. • In addition, the government is responsible for creating the infrastructure necessary for commerce. The banking system, national defense, and the transportation system are all part of this infrastructure. • If taxes did not exist, then these services would likely not exist either.
c. List sources of tax monies paid to different levels of government. d. Identify ways that tax monies are used by the different levels of government. Federal Government: • Sources of Tax Monies: Income taxes, Excise taxes • Expenditures: National defense, Education, Transportation systems, • Judicial system, Social Security and Medicare, Medicaid, Veterans services, etc. State Governments: • Sources of Tax Monies: Income taxes, Sales taxes, Excise taxes • Expenditures: State police protection, Education, Operation of state government, etc. Local Governments: • Sources of Tax Monies: Property taxes, Sales taxes, Income taxes • Expenditures: Education, Public health and safety (local fire and police protection), Sanitation, etc. Explain how certain government expenditures are financed through specific taxes. • Roads, highways, and bridges are financed through the gasoline excise tax. • Only those people who purchase gasoline—those who use the transportation system—pay the gasoline tax. • The Social Security system, which provides income to retired workers, receives its monies from retirement taxes.
e. Describe tax structures. Proportional: A tax structure in which everyone pays the same percentage of income in taxes, regardless of income level. (Few taxes are completely proportional in nature.) Progressive: A tax structure in which those who earn more pay a higher percentage of income in taxes. In other words, as the income increases, the tax rate increases. The Federal income tax is a progressive tax. Regressive: A tax structure in which those who earn more income pay a lower percentage of income in taxes. As income increases, the tax rate decreases. Sales and excise taxes are considered to be regressive taxes, because those people with lower incomes ultimately pay a larger percentage of their income in sales and excise taxes.
f. Explain the Internal Revenue Service’s roles. • To collect federal income taxes • To enforce federal revenue law • To help taxpayers with tax law • To pursue taxpayers who are not in compliance with tax law
g. Illustrate the impact of taxation on the circular flow of income model. • The circular flow model illustrates the constant movement of production inputs, goods, services, and money in the economy. For a good introduction on a simple circular flow of income model, have the students watch the flash movie/tutorial The circular flow of income model by Manfred Gartner at http://www.fgn.unisg.ch/eurmacro/tutor/circularflow.html • (Do NOT continue on to the interactive Java applet—it goes into much more detail than is required for this lesson.) • After this short introduction to the circular flow model, consider the role of the government—specifically, taxes—in the economy. How does the government fit into the circular flow of income model? • The government sector can be added to the center of the circular flow model, and taxes are the flow between the household sector and the government sector. The government insists that households divert some monies away from consumption and spending to go toward the government.
Student Activity: • Direct your students to the AmosWEB website Taxes at http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=taxes for a good illustration of the circular flow model including the government sector and taxes • h. Explain how government expenditures are financed. • Students should search local newspapers to locate articles in which individuals or groups are opposed to an increase in taxation. In a written report, each student should identify the nature of the tax, how the monies are to be used, and the nature of the opposition to the tax. Each student should indicate his/her position on the tax increase and provide a rationale for her/his stance.
2.03 Analyze cost/profit relationships to guide business decision-making. Explain the concept of organized labor and business
a. Define the following terms: labor union, local, national, federation, collective bargaining, strikes, picketing, boycotts, featherbedding, lockouts, injunctions and strikebreakers. • A labor union is an organization of wage earners or salary workers established for the purpose of protecting their collective interests when dealing with employers. • Local unions are the building blocks of the labor movement. • Most craft unions began as local unions, which then joined together to form national organizations. • National unions are composed of the various local unions that they have chartered • A federation is an association of unions. • Collective bargaining consists of negotiations between an employer and a group of employees so as to determine the conditions of employment. • A boycott is an act of voluntarily abstaining from using, buying, or dealing with a person, organization, or country as an expression of protest, usually for political reasons. It can be a form of consumer activism. • A picket is a style of protest in which striking workers assemble outside a place of employment to make the public aware of their cause. • a strike occurs when all the workers in the union stop coming to work • Strikebreakers try to fight back against the union, sometimes through lawsuits and legislation, sometimes with violent thugs. • Featherbedding used to describe the practice of a labor union requiring an employer to hire more workers than necessary for a particular task. • A lockout is a work stoppage in which an employer prevents employees from working • An injunction is an equitable remedy in the form of a court order that requires a party to do, or to refrain from doing, certain acts.
b. Identify reasons that labor unions form. • The American economy shifted from an agricultural to an industrial base; industrial workers, who were concentrated in urban areas and increasingly shared the same language (English), were thus able to create a common culture that was absent among earlier generations of workers. • The Depression created a backlash against big business entities, who were viewed as the chief culprits for the country's economic difficulties. • Changing political dynamics also played an important role. Active support for organized labor was an integral part of Roosevelt's New Deal, and the passage of the National Labor Relations Act (NLRA) in 1935 was a potent new weapon for union organizers. The NLRA provided a means for official recognition of labor unions. Once recognized, an employer was legally bound to bargain with the union, enforceable by government action. • Economic growth during World War II and in the post-war era was an important facilitator of union growth.
c. Identify types of labor issues. • If a worker represented by the union believes his or her rights under the union contract have been violated, then the union may intervene on that person's behalf. • Examples of such situations include the discharge of an employee, failure to promote an employee according to a contract seniority clause, or failure to pay an employee for overtime. • Virtually any provision of a contract can become a source of contention. • The local union may try to settle the issue informally. If that effort is not successful, the union may file what is known as a grievance . • This is a formal statement of the dispute with the employer; most contracts set forth a grievance procedure.
d. Classify types of unions. • Craft unions represent employees in a single occupation or group of closely related occupations. • The members of craft unions are generally highly skilled workers. Examples of craft unions include the various skilled trades in the construction industry, such as carpentry, plumbing, and electrical work. • professional union is generally understood to be an employee with advanced and highly specialized skills, often requiring some credentials, such as a college degree and/or a license. Example: Teachers Union • An industrial union represents workers across a wide range of occupations within one or more industries. A good example of a typical industrial union is the United Automobile Workers (UAW). • General unions organize workers across all occupations and industries
e. Describe levels of union organization. f. Describe types of union organization • Local unions represent members in a specific geographic area, such as a city, state, or region. These local unions make up the base of a national union, which unites all its affiliated local unions under one constitution. • The Teamsters and the United Steel Workers of America are two examples of large national unions, each uniting many local unions. • The top level of labor union organization is the federation, such as the AFL-CIO. Such a federation is made up of many national and/or international unions. The purpose of the federation level is to coordinate its affiliated unions, settle disputes between them, and serve as the political representative of the union members.
g. Describe the collective bargaining process. • Collective bargaining consists of the process of negotiation between representatives of a union and employers (generally represented by management, in some countries by an employers' organization) in respect of the terms and conditions of employment of employees, such as wages, hours of work, working conditions and grievance-procedures, and about the rights and responsibilities of trade unions. • The parties often refer to the result of the negotiation as a collective bargaining agreement (CBA) or as a collective employment agreement (CEA).
h. Explain types of union negotiation strategies. Distributive Negotiation • The term distributive means; there is a giving out; or the scattering of things. By its mere nature, there is a limit or finite amount in the thing being distributed or divided amongst the people involved Integrative negotiation • The word integrative means to join several parts into a whole. Conceptually, this implies some cooperation, or a joining of forces to achieve something together. Usually involves a higher degree of trust and a forming of a relationship. Both parties want to walk away feeling they've achieved something which has value by getting what each wants. • Integrative negotiation process generally involves some form or combination of making value for value concessions, in conjunction with creative problem solving. It is often described as the win-win scenario.
i. Describe types of management negotiation strategies. • Avoiding Conflict Resolution Style. the manager is not very cooperative in helping the other individuals to achieve their goals, but neither is he/she aggressively pursuing his/her own preferred outcomes in the situation. The original problem, conflict, or situation is never directly addressed or resolved. However, avoiding behavior might be appropriate when the issue is perceived by the manager to be trivial. It might also be an appropriate approach to use when there is no chance of winning or when disruption would be very costly. • Competing Conflict Resolution Style. The competing style of resolving conflict is also known as the win-lose approach. This approach may be appropriate when quick, decisive action is needed, such as during emergencies. It can also be used to confront unpopular actions, such as urgent cost cutting. • Accommodating Conflict Resolution Style. A manager using this style subjugates his/her own goals, objectives, and desired outcomes to allow other individuals to achieve their goals and outcomes. This behavior is appropriate when people realize that they are in the wrong or when an issue is more important to one side than the other. This conflict resolution style is important for preserving future relations between the parties. • Compromising Conflict Resolution Style. Compromise can also be referred to as bargaining or trading. This behavior can be used when the goals of both sides are of equal importance, when both sides have equal power, or when it is necessary to find a temporary, timely solution. It should not be used when there is a complex problem requiring a problem-solving approach. • Collaborating Conflict Resolution Style is often described as the win-win scenario. Both sides creatively work towards achieving the goals and desired outcomes of all parties involved. The downside of this approach is that the process of collaborating mandates sincere effort by all parties involved and it may require a lot of time to reach a consensus.
Student Activity: • Ask students to search the Internet for information about unions—their benefits, requirements, pressure strategies, etc. Each student should evaluate the information obtained to determine whether s/he would want to be a union member. Each student should then write a short paper persuading others to support her/his point of view. j. Explain the effects of unionism on workers. • http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=2154 • http://www.bls.gov/opub/cwc/cm20050616ar01p1.htm k. Describe the effects of unionism on businesses. • http://businessknowledgesource.com/smallbusiness/how_unions_affect_small_business_025808.html
2.03 Analyze cost/profit relationships to guide business decision-making. Analyze the impact of specialization/division of labor on productivity
a. Define the following terms: specialization of labor, division of labor, depth of jobs and scope of jobs. Define the term specialization: • The process of making the best use of resources in the production of goods and services • We specialize in the production of certain goods and services and exchange them for other goods and services. • If you decided to produce all the goods and services you needed, rather than producing some and trading for others, you would have less time to devote to the production of any one item, resulting in production of fewer items than if you’d specialized. Explain the scope of jobs. • Defined as the number of different operations you do on the job and the frequency with which you do them • The lower your task level, the lower the scope of the job • Example: • Low scope: The job is to put doors on cars on an assembly line. • Higher scope: The job is to put doors on cars, put seats in cars, and check the steering mechanism. Describe the depth of jobs. • Defined as the amount of control you have over the tasks that you do • Example: • Low depth: There are strict guidelines you must follow, and you make very few decisions. • High depth: You follow general guidelines and set your own pace.
b. Describe how resources are involved in specialization. • Natural resources: We locate businesses where they can be the most successful (e.g., ski lodge in the mountains close to the slopes, orange groves in states with warm climates). • Capital goods: Specialized capital goods contribute to increased production (e.g., use of robots on assembly lines). • Human resources: This occurs when people use their different skills and abilities in jobs for which they are best suited. People should do what they do best so that the most goods and services can be produced.
c. Identify forms of specialization of human resources.d. Describe specialization by trade or profession.e. Describe specialization by stage of production.f. Describe specialization by task. • Specialization by trade or profession: This is the type of work you perform to earn a living (e.g., teachers, farmers, doctors, plumbers, artists, etc.). • Specialization by stage of production: This form occurs when more than one state of production is needed to change a raw material into a finished product. • Specialization by task: This form occurs when jobs are so specialized that a worker does only one small part of the total job (e.g., in a textile mill, one worker cleans wool, another spins it into yarn, another dyes the yarn, and another weaves it into a woolen fabric). This type of specialization is also known as division of labor.
g. Explain the relationship between the depth and scope of a job. Example: How a manager’s scope and depth can change during one day. • The manager chooses advertising design and layout scheme for an upcoming promotion (high depth, high scope) • The manager makes out the weekly work schedule for employees (high depth, low scope) • The manager signs employee time cards (low depth, low scope) • The manager evaluates employee performance according to the owner’s standards (low depth, high scope) • The scope and depth of certain jobs within a company can change more than that of another employee in the same company.
h. Describe the advantages of specialization. • Simplified worker training • Increased employee interest and satisfaction • Increased production rates • Increased level of skill • Increased quality of work • Ease of transferring to a similar job
i. Explain the disadvantages of specialization. • Increased interdependency • Increased boredom on the job • Decreased pride in work • Decreased morale and enthusiasm for the job • Increased chance of obsolescence because of technological advances • High degree of specialization may cause difficulty transferring or obtaining another job
j. Describe ways to overcome the disadvantages of specialization. Explain ways that businesses combat the disadvantages associated with specialization. • Job enlargement: Management may combine job tasks to restore wholeness (e.g., instead of limiting salespeople strictly to selling merchandise, their jobs may be enlarged to help with displays, restocking merchandise, etc.). • Job rotation: Managers may also rotate employees periodically so that they learn new job tasks and see how their old tasks relate to the new tasks. • Job enrichment: Managers add interest to a task to increase a job’s depth, allowing workers to make more decision, set their own pace, and supervise others. • Job satisfaction: Managers may ask for and use employee suggestions; allow flexible or alternative work schedules; praise work well done; and provide cash incentives, contests, and bonuses.
2.03 Analyze cost/profit relationships to guide business decision-making. Explain the impact of the law of diminishing returns
a. Define the following terms: stages of production, theory of production, production function, increasing returns, diminishing returns, law of diminishing returns, law of variable proportions, marginal product, negative returns, marginal cost, total revenue, and marginal revenue. • Stages of production -Production within an economy can be divided into three main stages: primary, secondary and tertiary. • Theory of Production deal with the relationship between the factors of production and the output of goods and services • A production function provides an abstract mathematical representation of the relation between the production of a good and the inputs used. A production function is usually expressed in this general form: Q = f(L, K) • Increasing returns to scale results if long run production changes are greater than the proportional changes in all inputs used by a firm. • Diminishing Returns - A yield rate that after a certain point fails to increase proportionately to additional outlays of capital or investments of time and labor. • Law of Diminishing Returns - (Sometimes also referred to as the law of variable proportions) When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller. • Marginal Product - The change in the quantity of total product resulting from a unit change in a variable input, keeping all other inputs unchanged. Example: marginal product = change in total product/ change in variable input • Negative Returns - This occurs when a company or business has a financial loss or lackluster returns on an investment during a specific period of time. • Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. • Total revenue is the total receipts of a firm from the sale of any given quantity of output • Marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price.
b. Explain the stages of production. Primary Production • Primary production involves the extraction of raw materials (e.g. coal, iron, agricultural commodities). • Raw materials can be: • Extracted – e.g. coal, iron ore, oil, gas and stone • Harvested / collected – e.g. fish • Grown – e.g. timber, cereal crops • There is little value added in primary production. The aim is usually to produce the highest quantity at lowest cost to a satisfactory standard. Secondary Production • Secondary production involves transforming raw materials into goods. There are two main kinds of goods: • Consumer goods – e.g. washing machines, DVD players. As the name implies, these are used by consumers • Industrial / capital goods – e.g. plant and machinery, complex information systems. Industrial and capital goods are used by businesses themselves during the production process. • In the secondary production sector, value is “added” to the raw material inputs. For example, foodstuffs are transformed into ready meals for sale in supermarkets; metals, fabrics, and plastics are transformed into motor vehicles. • There are many different industry sectors in secondary production. For example: • Construction • Electronic instruments • Pharmaceuticals (drugs) • House-building Tertiary Production • Tertiary production is associated with the provision of services (an intangible product). As with the secondary sector, there are many tertiary production markets. • Good examples include: • Hotels • Private healthcare and education • Accountants • Tourism
c. Describe the impact of the law of diminishing returns on production decisions. • The law of diminishing returns says that adding more of one input while holding other inputs constant results eventually in smaller and smaller increases in added output. • What the law of diminishing returns says is that as one continues to add workers, eventually one will reach a point where increasing returns stop and decreasing returns set in.
d. Explain how total revenue and marginal revenue are used to determine the amount of output that will generate the most profit. • The change in total revenue resulting from a change in the quantity of output sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra unit of output. • marginal revenue = change in total revenue/ change quantity
Student Activity: • Ask students to participate in a small-group activity to construct paper boxes following the instructions on page 5-30 and using the pattern on page 5-31. Determine the number of boxes that can be made by a three-member group in one minute. Continue the construction process, adding one worker at a time and checking productivity at one-minute intervals. Find the point at which the additional person does not increase productivity. Discuss with the class how the principle of diminishing returns relates to productivity.
2.04 Understand economic indicators to recognize economic trends and conditions. Describe the economic impact of inflation on business
Define the following terms: inflation, inflation rate, deflation, Consumer Price Index, standard of living, targeted inflation rate, and price stability. • INFLATION: A persistent increase in the average price level in the economy. Inflation occurs when the AVERAGE price level (that is, prices IN GENERAL) increases over time. • INFLATION RATE: The percentage change in the price level from one period to the next. The two most common price indices used to measure the inflation are the Consumer Price Index (CPI) and the GDP price deflator. • DEFLATION: An extended decline in the average level of prices. This is the exact opposite of inflation • CONSUMER PRICE INDEX: An index of prices of goods and services typically purchased by urban consumers. • STANDARD OF LIVING: In principle, an economy's ability to produce the goods and services that consumers use to satisfy their wants and needs. In practice, it is the average real gross domestic product per person--usually given the name per capita real GDP. • PRICE STABILITY: The condition in which the average price level in the economy does not change or changes very slowly.
Describe causes of inflation. • The two basic types (or causes) of inflation: demand-pull inflation and cost-push inflation. • Demand-pull inflation, as the name clearly indicates, results when economy-wide shortages are created by increases in aggregate demand. • Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.
Explain how inflation impacts the economy. • INFLATION PROBLEMS: Two notable problems are associated with inflation: uncertainty and haphazard redistribution. • Inflation, especially inflation that varies from month to month and year to year, makes long-term planning quite difficult. • Prices, wages, taxes, interest rates, and other nominal values that enter into consumer, business, and government planning decisions can be significantly affected by inflation. • Moreover, inflation tends to redistribute income and wealth in a haphazard manner; some people win and some people lose. But this redistribution might not that desired by society, failing to promote any of the basic economic goals of efficiency, equity, stability, growth, or full-employment.
Describe the relationship between price stability and inflation. • Price stability is commonly indicated by the inflation rate, calculated as percentage changes in either the Consumer Price Index (CPI) or the GDP price deflator. However, price stability is more generally the ABSENCE of large or rapid increases or decreases in the price level. • Inflation results when the AVERAGE of these assorted prices follows an upward trend. Inflation is the most common phenomenon associated with the price level.
Explain problems associated with deflation. • Like inflation, deflation occurs when the AVERAGE price level decreases over time. While some prices might decrease, other prices could increase or remain unchanged, so long as the AVERAGE follows a downward trend. • Deflation is a rare bird indeed in our economy and typically happens only when we're in a prolonged period of stagnation. We might see some deflation during a fairly lengthy recession, but more than likely deflation saves itself for the occasional depression that dots our economic landscape.
Discuss reasons why the inflation rate should be above zero. • When the rate falls below zero, as it did briefly in 1954, average prices actually are falling (deflation). While lower prices may seem ideal at first from a consumer's point of view, deflation leads to rising unemployment and falling production, a situation from which it is extremely difficult to recover. An inflation rate of 1 - 2.5% currently seems to be acceptable by many economists.