Question

Briefly explain whether production of each of the following goods is likely to fluctuate more or less than real GDP does during the business cycle. a. Ford F-150 trucks b. McDonald's Big Macs c. Chevron's sales of advanced plastics to be used in automobile manufacturing d. Huggies diapers e. Boeing passenger aircraft

Short answer

a. Ford F-150 trucks and c. Chevron's sales of advanced plastics will fluctuate more with the business cycle. b. McDonald's Big Macs and d. Huggies diapers will fluctuate less. e. Boeing passenger aircraft will also fluctuate more as these are high ticket items and their purchase can be delayed during economic downturns.

Step-by-step solution

Analysis of nature of goods

Identify the nature of each of the goods given. Are they considered a necessity or a luxury? High value or inexpensive? Long-term or disposable?

Impact of Business Cycles

Understand how the business cycle impacts the production and consumption of each type of good. During economic downturns, demand for luxuries and expensive items tends to decrease, while necessities remain relatively stable.

Fluctuation of Production

a. Ford F-150 trucks - Production will likely fluctuate more because trucks are considered a big-ticket item, demand falling in hard economic times. b. McDonald's Big Macs - Production may fluctuate less as fast food is generally considered affordable and its demand remains relatively stable. c. Chevron's sales of advanced plastics - Production may fluctuate more since these materials are used in automaking, a sector greatly impacted by economic conditions. d. Huggies diapers - Production likely fluctuates less because diapers are a necessity for families with babies, regardless of economic state. e. Boeing passenger aircraft - Production will likely fluctuate more due to the high cost and the investment being postponed during economic downturns.

Key concepts

Economic Fluctuations

The business cycle describes the rise and fall of economic activity over time, involving periods of expansion and contraction. These are known as economic fluctuations. During expansions, businesses grow, employment rises, and consumers spend more, leading to increased production of goods. But during contractions or recessions, consumer spending and business investments drop, causing a decrease in goods production.

Economic fluctuations have a significant impact on different sectors and types of goods. For example, luxury goods and costly investments tend to see larger declines during recessions. This happens because people prioritize essential expenses and postpone non-essential or luxury purchases when money is tight. Recessions tend to hit sectors like automotive and aerospace hard, impacting the production of big-ticket items like cars and airplanes.

Conversely, the demand for necessities tends to be more stable, regardless of the economic climate. Essential goods like food, basic clothing, and household products are less impacted by economic fluctuations, as they are required for day-to-day living. Let's explore how these fluctuations affect specific types of goods in the following sections.

Goods Production

The production of goods is directly tied to the overall economic climate and consumer demand. When the economy is doing well, consumers and businesses are more likely to spend on a wide range of goods, from daily needs to luxury items. This increased spending boosts production as companies ramp up efforts to meet demand.

During downturns in the business cycle, production of certain goods decreases. Companies might slow down manufacturing or halt new projects entirely due to declining demand. For example, the production of items like Ford F-150 trucks tends to fluctuate significantly because they are seen as discretionary purchases that people delay during tough economic times.

• Durable goods: Items like cars and aircraft are durable, meaning they last for a long time. Their production is sensitive to the business cycle.
• Nondurable goods: Products with a short life span, like food items, tend to have more stable demand and production.

In summary, the type of good produced - whether durable or nondurable - plays an important role in how its production will be affected by economic fluctuations.

Necessity vs. Luxury

Goods can be generally categorized into necessities and luxuries, and this distinction significantly influences their production and demand during different phases of the economic cycle.

• Necessities: These are essential goods that remain in demand regardless of economic conditions. Basic food items, toiletries, and infant care products like Huggies diapers fall into this category. Since people continue purchasing these regardless of the economic climate, their production tends to be more stable.
• Luxuries: Goods that are non-essential and often more expensive, like luxury cars or high-end electronics, are classified as luxuries. Items such as Boeing passenger aircraft are also in this group. Demand for luxuries can drop sharply in economic downturns as consumers cut back on non-essential spending.

This difference between necessities and luxuries illustrates why certain industries experience more significant production fluctuations during economic changes, thereby impacting their overall stability during the business cycle. Understanding these categories helps businesses and economists predict how different sectors will perform when the economy shifts.