Recession

Recession

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Today more than ever, there is a major and constant fear of an impending recession in our government’s economy. A recession is a downturn in the economy when output and employment are falling for at least a period of six months. (Krugman and Wells, 2006) This is due to a number of factors: people buying less, a decrease in factory production, growing unemployment, a slump in personal income, or an unhealthy stock market. (Harris, 2002) These factors including scarcity, choice, and opportunity cost are the reasons that an economy is considered in a recession and how something like this happens.
One main impact on what happens in and to the economy is the factor of choice. The economy cannot work on its own; it needs the consumers to drive it based on their wants. The producers and consumers are the driving force of the economy. This is where resources come into play. Resources are anything that can be used to produce something else such as land, labor, physical capital, and human capital. (Krugman and Wells, 2006) These resources are what allow producers to create products, and for consumers to purchase and use what is produced. Supply and demand also play a part in the producer/consumer relationship. Producers’ outputs and prices are based on the willingness of the consumers to purchase the products. However, what happens if the resources all of a sudden become scarce and there is a shortage? How does this affect the state of the economy?
Firstly, if certain resources become scarce, the price of the remaining supply will go up. In order to try to recoup losses, the prices of resources that the producers have to purchase to create products will increase. This in essence will throw off the entire flow and stability of the economic system. Scarcity causes trade-offs which then lead to an opportunity cost, or what is given up. Due to the scarcity of products, producers must pay more to get the material they need, which forces them in turn to raise the prices that the consumers must pay, which leads to the next point: individual choice.
Secondly, as stated before, the economy runs by the decisions that the consumer makes: choices, whether it is to buy or not to buy. The choice to perform a certain action includes the choice of not performing a certain action. (Krugman and Wells, 2006) For example, the choice to buy a burger from Burger King includes the choice of not buying a burger from McDonalds.

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Individual choice is included in both the producer and consumer category. The producers must make a decision on which resource to use, which products will be created, amount that will be created, how much it will cost, and where it will be sold. On the other hand, the consumers also have choices to make, such as what to buy, when to buy, how much to buy, and where to get it. These factors of individual choice also spill over into the realm of opportunity cost, or what one must give up in order to get a product. (Krugman and Wells, 2006)
A person’s opportunity cost is based on the choices of doing one thing or another. For example, the opportunity cost of buying the burger from Burger King is forgoing the microwave taste of their burgers. Whether good or bad, it is the cost of choosing one over the other. Both producers and consumers encounter opportunity costs and in the end must make a decision that will affect the rest of the economy. Economics deals with the efficiency the scarce resources are used and the opportunity costs involved. The choice can be between the overall costs vs. overall quality, and the decision would be based on the opportunity cost of the situation.
No matter how you look at it scarcity, choice, and opportunity cost are concepts involved in almost every aspect of the economy and how it is affected. It is no different when it comes to the issue of recession. The scarcity of resources and means to produce are what starts the ball rolling toward a recession. When these resources are limited, the producers have to make decisions about how to handle the situation. They must change their business plan and the effects of that reverberate throughout the entire economic structure. The consumers must then change their thought process and reconsider the choices that they make. The lack of resources causes the rise in price for the producer, which forces a rise in price for the consumer, who then makes the decision of whether or not to buy a product. These the consumer makes these choices on the bases of the opportunity cost involved. They have to look at what they will get and what they will not get by choosing one over the other. When consumers see that it is more efficient for them not to purchase a product or to purchase less of it, which is when the economy is in trouble.
In order to prevent or get the country out of a recession, fiscal and monetary policies are instituted. In the case of fiscal policies, the government influences the economy by changing how it spends and collects money. (Harris, 2002) Such policies might include tax cuts for the people, increased spending to create new jobs, and automatic fiscal policies like unemployment insurance, which are dictated by congress and the President. (Harris, 2002) Monetary policies involve the money supply that is readily available in the country. Monetary policies are a form of stabilization that involves the quantity of money in circulation or interests rates changing. (Krugman and Wells, 2006) The Federal Reserve System can reduce the reserve ratio, lower the federal funds rate, lower the discount rate on loans, or use its own money to buy government bonds. (Harris, 2002)
A recession is something that for the most part is predictable, yet can be devastating to a country’s economy. The concepts of scarcity, choice, and opportunity cost are major factors in whether or not a recession occurs or not. These concepts are synonymous with our understanding of the economy and in essence everything economic.

References

Harris, Tom. "How Recessions Work." Howstuffworks. 15 Jan. 2002. 9 Feb. 2008 .
Krugman, Paul, and Robin Wells. Macroeconomics. New York: Worth, 2006.
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