The two other types of competition are oligopoly and monopoly. An oligopoly is the market structure that exists when there are very few businesses selling a product. In an oligopoly, individual businesses have control over their products’ price because each business supplies a large portion of the products sold in the marketplace. Prices charged by different firms stay fairly close because a price cut or increase by one company will trigger a similar response from another company. A monopoly is the market structure that exists when there is only one business providing a product in a given market. Utility companies that supply electricity, natural gas, and water are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices. 28
Economies are not stagnant; they expand and they contract. Economic expansion occurs when an economy is growing and people are spending more money. Their purchases stimulate the production of goods and services, which in turn stimulates employment. The standard of living rises because more people are employed and have money to spend. Rapid expansions of the economy, however, may result in inflation , a continuing rise in prices. Inflation can be harmful if individual’s incomes do not increase at the same pace as rising prices, reducing their buying power. Economic contraction is a slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers. Contractions of the economy lead to recession – a decline in production, employment and income. 29
Recessions are often characterized by rising levels of unemployment , which is measured as the percentage of the population that wants to work but is unable to find jobs. Rising unemployment levels tend to stifle demand for goods and services, which can have the effect of forcing prices downward, a condition known as deflation . 30
A severe recession may turn into a depression , in which unemployment is very high, consumer spending is low, and business output is sharply reduced. Economies expand and contract in response to changes in consumer, business, and government spending. Although fluctuations in the economy are inevitable and to a certain extent predictable, their effects—inflation and unemployment—disrupt lives and thus governments try to minimize them. 31
Inflation can be harmful if individuals’ incomes do not increase at the same pace as rising prices, reducing their buying power. The worst case of hyperinflation occurred in Hungary in 1946. At one point, prices were doubling every 15.6 hours. One of the most recent cases of hyperinflation occurred in Zimbabwe. Zimbabwe suffered from hyperinflation so severe that its inflation percentage rate rose into the hundreds of millions. With the elimination of the Zimbabwean dollar and certain price controls, the inflation rate began to decrease, but not before the country’s economy was virtually decimated.
You've reached the end of your free preview.
Want to read all 39 pages?