How does a high unemployment rate affect the activity of product markets?

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Stephen Holliday | College Teacher | (Level 1) Distinguished Educator

Posted on

Product markets are actually markets in which certain types of products are easily marketed and in demand.  Let's take a couple of examples of product markets in a good and bad economy.

In many California counties, for example, income per capita is quite high and therefore demand for luxury goods, from cars to swimming pool, is, in normal (healthy) economic times, very strong.  Producers of those luxury goods flock to areas like that in order to sell and service these goods.  Further, companies who provide landscaping around pools, pool furniture, pool services and ancillary services sprout everywhere to take advantage of the proximity of the opportunities.

As the unemployment rate declines significantly, there are fewer people who either can afford to buy new pools and new Mercedes, and because these people have less discretionary income to spend on luxury goods, the market for new goods, as well as services, begins to decline.

Another casualty of a low employment rate is real estate, specifically single-family homes.  Even though real estate values may decline, and may have even precipitated to economic slide, unemployment and under-employment keep people locked into their current homes who might otherwise want to move from smaller to larger homes.  Let's assume that in a decent economy, there are 250 used home sales per year in a particular county.  The higher unemployment rates go, the less likely it is that people can move from one home to another, so the real estate industry, whose product is homes, grinds to a halt because its product--used homes--is no longer in demand.  All the ancillary industries that support the used home industry also begin to fail because their product--their service-is not in demand.


pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The product market is the market in which businesses sell goods and services to consumers.  There will be much less of such activity if there is a high unemployment rate.

If there is high unemployment, households in the economy will have less money because fewer people are earning wages.  If this happens, the households will be able to buy fewer goods and services from businesses.  This will mean that there is less activity in product markets.

If there is high unemployment, there is also less activity in the resource market.  This is because fewer people are selling their labor to firms that produce goods or services.

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