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Economic Terms

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Frictional unemployment

The type of unemployment that measures the time period between jobs when economic agents are searching for jobs or in the process of moving to another job. Another term for this is search unemployment

Below is a diagram to illustrate the effects of frictional unemployment on an economy in a AD-AS framework. In this instance an increase in frictional unemployment reduces the pool of labour available for firms to hire and this pushes up the wages of existing workers as the labour market tightens and workers become more valuable in the employer's eyes. This then causes the SRAS curve to shift inwards as firms have to cut production with a lack of employment. But because frictional unemployment is often a form of short-term employment these effects are soon reversed and the economy moves back to its original position.

Full capacity

This is the maximum level of output sustainable in the long run given the current quantity and quality of productive resources.

Below shows an example of a country's PPF and as they are operating on the PPF they are at full capacity as no slack in the economy exists i.e. all resources and factors of production are being fully utilised.


Full employment

The level of output where all available factors of production are being fully utilised.

Below is a diagram that shows when an economy is in equilibrium and no output gaps exist and the economy is positioned at the full employment output level. Any output level beyond the full employment level introduces inflationary pressures into the economy, because unless there is an outward shift in the LRAS curve, then there are too few resources to produce too many goods. Likewise if the output level falls below the full employment level then this will introduce deflationary pressures into the economy as now there are too many resources to produce the amount of goods and services required.


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