The Impact of Rapid Price Increases and Dramatic Employment Drops on U

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Jan 9, 2024

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Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 1

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The Impact of Rapid Price Increases and Dramatic Employment Drops on U.S. Economic Activity The U.S. economy has witnessed several major economic events that have significantly influenced supply, demand, and economic equilibrium. This analysis will focus on two pivotal events: the 1973 oil embargo, which led to rapid price increases, and the combined impact of the 2006 housing bubble burst and the subsequent Great Recession, which resulted in dramatic employment drops. We will examine how these events affected various sectors of the economy and explore the measures taken by the government and businesses to restore economic equilibrium. I. The 1973 Oil Embargo and Rapid Price Increases: The 1973 oil embargo was a pivotal event in the history of the U.S. economy, caused by OPEC's decision to halt oil exports to countries that supported Israel during the Yom Kippur War. This abrupt disruption in the supply of oil led to a significant increase in oil prices and cascading effects on various industries, such as transportation, manufacturing, and agriculture. “The onset of the embargo contributed to an upward spiral in oil prices with global implications. The price of oil per barrel first doubled, then quadrupled, imposing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. Since the embargo coincided with a devaluation of the dollar, a global recession seemed imminent.” (OOTH, nd.) 2

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The extensive ramifications of the embargo, encompassing heightened inflation and economic stagnation among oil-importing nations, emerged as a result of a intricate interplay of factors that extended beyond the immediate actions taken by the Arab member nations of OPEC. The waning influence of U.S. and European oil corporations, commonly referred to as the "Seven Sisters," which had previously contributed to stabilizing the global oil market, coupled with the diminishing surplus capacity of East Texas oil fields, and the recent decision to allow the U.S. dollar's value to fluctuate freely in international currency exchanges, all contributed to the exacerbation of the crisis. As these overarching factors began to take effect across the United States, they instigated a series of additional measures that went beyond the efforts made in April and November of 1973, which had primarily focused on energy conservation and the development of domestic energy resources. Among these measures were the establishment of the Strategic Petroleum Reserve, the implementation of a national speed limit of 55 miles per hour on U.S. highways, and subsequently, the imposition of fuel economy standards during President Gerald R. Ford's administration. This sequence of events also gave rise to the proposal for the creation of the International Energy Agency, championed by Henry Kissinger. 1. Impact on Supply and Demand: 3

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Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 “The U.S. monthly average import price for crude oil stood at $2.75 per barrel in January 1973; by September it had increased 23% to $3.38. In October 1973 the Persian Gulf members of OPEC doubled the price of their crude oil, then in January 1974 doubled it again. By that time the average price in the U.S. for imported oil had more than doubled to $6.92 per barrel, and by March it had increased to $11.10. Prices drifted upward during the next four years and held around $13.50 per barrel throughout 1978.” (Hervey. 1994.) The sudden reduction in oil supply caused a spike in energy costs, forcing businesses to bear higher production expenses. As a result, producers had to pass these increased costs onto consumers through higher prices for goods and services, thus creating inflationary pressures in the economy. With consumers facing higher costs of living, their purchasing power diminished, leading to a decrease in overall demand for goods and services. 2. Economic Equilibrium: The oil embargo's impact on the U.S. economy was severe and threatened the economic equilibrium. The rise in oil prices, coupled with reduced consumer spending, created stagflation - a combination of high inflation and unemployment. Policymakers faced a challenging task of stabilizing the economy while tackling the inflationary spiral. 3. Government Response: 4

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 To mitigate the impact of the oil shock, the U.S. government implemented several measures. The Federal Reserve tightened monetary policy to curb inflation, which resulted in higher interest rates. Additionally, President Richard Nixon imposed price controls to limit the increase in consumer prices. However, these measures had limited success, and the economy experienced a period of economic uncertainty until the oil prices stabilized. Price per barrel of oil per year: 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 $2.24 $2.48 $3.29 $11.58 $11.53 $12.80 $13.92 $14.02 $31.61 $36.83 II. The 2006 Housing Bubble Burst and the Great Recession: The U.S. housing market experienced a massive bubble leading up to 2006, fueled by lax lending practices and speculative investments. When the bubble burst, it triggered a severe financial crisis that affected not only the housing market but the entire economy, leading to a dramatic drop in employment. “The recession and crisis followed an extended period of expansion in US housing construction, home prices, and housing credit. This expansion began in the 1990s and continued unabated through the 2001 recession, accelerating in the mid-2000s. Average home prices in the United States more than doubled between 1998 and 2006, the 5

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 sharpest increase recorded in US history, and even larger gains were recorded in some regions.” (Weinberg, 2013.) 1. Impact on Supply and Demand: The housing bubble's collapse resulted in a sharp decline in property values and a surge in foreclosures. The real estate sector faced reduced demand, leading to a slowdown in construction activities and a contraction in the supply chain related to housing materials and services. As a consequence, employment in construction and related industries suffered significant job losses. 2. Economic Equilibrium: The rapid decline in the housing market had a domino effect on the overall economy. The downturn in the real estate sector caused a decline in consumer spending as homeowners experienced a decline in their wealth and confidence. This drop in consumption led to reduced demand for goods and services across various industries, exacerbating the economic downturn. “From peak to trough, US gross domestic product fell by 4.3 percent, making this the deepest recession since World War II. It was also the longest, lasting eighteen months. The unemployment rate more than doubled, from less than 5 percent to 10 percent.” (Weinberg. 2013) 3. Government Response: 6

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Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 In response to the Great Recession, the U.S. government and the Federal Reserve implemented several policies to stabilize the economy. The government injected funds into the financial system to support struggling banks and implemented fiscal stimulus packages to boost aggregate demand. The Federal Reserve employed unconventional monetary policies, such as quantitative easing, to lower interest rates and encourage borrowing and investment. Over time, these measures helped to restore confidence in the financial markets and encouraged economic growth. Both the 1973 oil embargo and the Great Recession were major economic events that had far-reaching consequences on the U.S. economy. Rapid price increases from the oil embargo led to inflation and stagflation, while dramatic employment drops during the Great Recession caused a significant economic downturn. The government's response in each case was essential in mitigating the impacts and restoring economic equilibrium. These events serve as important lessons for policymakers to be vigilant in monitoring economic indicators and implementing appropriate measures to maintain a stable and resilient economy. Part Two: Evolution of Economic Concentration in the Hollywood Movie Industry: A Comprehensive Evaluation. 7

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The economic concentration of the Hollywood movie industry has experienced significant evolution over the years. This evaluation will analyze the role of the four factors of production - land, labor, capital, and entrepreneurship - in determining the economic concentration of this industry. We will explore how competition and pricing influenced economic concentration, examine the impact on the supply chain, assess the relative importance of the factors of production, and make predictions for the future based on academic sources. 1. Influence of Competition and Pricing on Economic Concentration: Competition has played a crucial role in shaping the economic concentration of the Hollywood movie industry. The presence of a large number of film studios and production companies has created intense competition for market share and audience attention. As a result, major studios have engaged in aggressive pricing strategies to maximize profits and market dominance. This led to a trend of fewer blockbuster films receiving significant investment and widespread distribution while smaller, independent productions struggled to secure financing and access to distribution channels. The concentration of resources and market power among major studios has impacted smaller players and contributed to the oligopolistic structure of the industry. 2. Impact of Economic Concentration on the Supply Chain: 8

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The economic concentration of the Hollywood movie industry has influenced the entire supply chain, from film production to distribution and exhibition. Major studios' dominance has allowed them to control the production process, from securing prime shooting locations (land) to employing skilled actors, directors, and crew (labor). Additionally, the capital-intensive nature of film production has provided larger studios with a competitive advantage, as they can afford higher production budgets and marketing campaigns. This concentration of resources has influenced the selection and promotion of films available to audiences, shaping the industry's supply chain to cater to mass-market preferences. “In all, 2.4 million people—from special effects technicians to makeup artists to writers to set builders to ticket takers and more —work in jobs supported by the industry, which pays over $186 billion in wages annually.” (Motion Picture Association, 2023) 3. Importance of the 4 Factors of Production: a. Capital: Capital has been a critical determinant of economic concentration in the Hollywood movie industry. Access to substantial financial resources has enabled major studios to invest in high-quality productions, advanced technology, and extensive marketing campaigns, which further solidified their market position. “the rise of Hollywood as production location. The large existing American Northeast coast film industry and the newly emerging film industry in Florida declined as U.S. film companies started to locate in Southern California.” (Bakker, 2008.) 9

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Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 b. Entrepreneurship: Entrepreneurial skills have also been instrumental in determining economic concentration. The ability to identify and respond to market trends, make strategic decisions regarding film selection, and negotiate favorable distribution deals have given major studios a competitive edge. c. Labor: Skilled labor, including talented actors, directors, and production crews, plays a significant role in the industry. The availability of experienced and creative talent has contributed to the production of successful films, reinforcing the dominant position of major studios. d. Land: While land is essential in certain aspects of film production (e.g., shooting locations), its overall influence on economic concentration in the industry is relatively less significant compared to capital, entrepreneurship, and labor. 4. Predictions for the Future: Some potential changes for the Hollywood movie industry in the future might be: a. Digital Disruption: The rise of streaming platforms and online distribution may challenge the traditional dominance of major studios. Smaller production companies and independent 10

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 filmmakers can reach a global audience more easily, potentially reducing economic concentration. b. Diversification of Content: Audience preferences are evolving, with growing demand for diverse and inclusive storytelling. Studios that adapt to these changing preferences could likely gain a competitive advantage. c. Technological Advancements: Advancements in filmmaking technology may level the playing field to some extent, allowing smaller players to produce high-quality content at lower costs. The economic concentration of the Hollywood movie industry has been significantly influenced by competition, pricing, and the dominant role of major studios. The four factors of production, particularly capital and entrepreneurship, have played pivotal roles in shaping the industry's concentration. However, the industry is dynamic, and changes in technology, distribution methods, and consumer preferences may lead to shifts in economic concentration in the future. To remain competitive, stakeholders in the Hollywood movie industry should adapt to these changing dynamics and embrace new opportunities for growth and diversification. 11

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 References: Office of the Historian (n.d.) Oil Embargo, 1973–1974 https://history.state.gov/milestones/1969-1976/oil-embargo#:~:text=The%20onset%20of %20the%20embargo,stability%20of%20whole%20national%20economies . Hervey, J. (October 1994) The 1973 Oil Crisis: One Generation and Counting. Chicago Fed Letter. https://www.chicagofed.org/publications/chicago-fed-letter/1994/october-86 Weinberg, J. (November 22, 2013.) The Great Recession and Its Aftermath. Federal Reserve History https://www.federalreservehistory.org/essays/great-recession-and-its- aftermath Motion Picture Assosiation (January 23,2023) The American Motion Picture and Television Industry: Creating Jobs, Trading Around the World https://www.motionpictures.org/what-we-do/driving-economic-growth/ Bakker, Gerben. “The Economic History of the International Film Industry”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-the-international-film-industry/ 12

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