This document discusses short-run aggregate supply (SRAS) and how it differs from long-run aggregate supply (LRAS). It introduces three models that can explain the upward slope of the SRAS curve: the sticky-wage model, imperfect-information model, and sticky-price model. Each model results in the same short-run aggregate supply equation, where output deviates from potential when the price level differs from expected inflation. The document also discusses how the SRAS curve relates to the Phillips curve and how both represent the short-run tradeoff between inflation and unemployment.
The document discusses the economic concept of demand. It defines the law of demand and explains the substitution and income effects that influence demand. It then discusses how individual consumer demand relates to market demand and how firm demand depends on market structure. Finally, it covers elasticity concepts including price elasticity of demand and its determinants.
Market structure final perfect competitionTej Kiran
The document discusses the characteristics of perfect competition. Key points include:
- Under perfect competition there are many small buyers and sellers of homogeneous products, with free entry and exit from the market. Firms are price takers and competition is based on price.
- In the short run, individual firms have a perfectly elastic demand curve and produce at the quantity where marginal revenue equals marginal cost, given the fixed market price.
- In the long run, firms enter and exit the industry to earn normal profits, resulting in economic equilibrium with price equal to minimum average cost for all firms.
The document discusses market structures and perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, firms that are price takers, and easy entry and exit. Under perfect competition, firms are price takers and produce where marginal revenue equals marginal cost to maximize profits. In the long run, perfect competition leads to normal profits as firms enter and exit the market.
The document discusses market structures and perfect competition. It defines a market and provides quotes defining a market. It then discusses the characteristics of perfect competition, including large numbers of buyers and sellers, homogeneous products, and perfect information. Equilibrium for a firm under perfect competition occurs where marginal cost equals marginal revenue and the marginal cost curve cuts the marginal revenue curve from below.
The document discusses the characteristics and profit maximization of firms operating under pure competition. It can be summarized as follows:
1) Under pure competition, there are many small firms, standardized products, free entry and exit of firms, and firms act as price takers.
2) In the short run, firms will produce the quantity where marginal revenue equals marginal cost to maximize profits or minimize losses.
3) In the long run, if profits exist firms will enter to increase supply and drive the price down until it equals minimum average cost, resulting in zero economic profits.
Pricing decisions under different market structuresdvy92010
This document summarizes pricing strategies under different market structures:
- Perfect competition firms are price takers and price is determined by market supply and demand.
- Perishable goods must be sold at the market price on the day, while non-perishable goods can be stored and sold when prices are higher.
- Monopolies are price makers that charge high prices to earn monopoly profits through trial and error or by setting price where marginal revenue equals marginal cost.
- Under monopolistic competition, firms set differentiated prices and the demand curve is elastic. In long run, entry of new firms eliminates economic profits.
- Oligopolies may engage in price rigidity, non-price
The document discusses the concept of perfect competition in economics. It provides the key characteristics that define a perfectly competitive market including that there are many small firms, no barriers to entry or exit, identical products, and complete information. Firms are price takers and seek to maximize profits by producing where marginal cost equals marginal revenue. In the long run, perfect competition leads to zero economic profits as new firms enter if profits are positive and firms exit if losses occur.
The document discusses the economic concept of demand. It defines the law of demand and explains the substitution and income effects that influence demand. It then discusses how individual consumer demand relates to market demand and how firm demand depends on market structure. Finally, it covers elasticity concepts including price elasticity of demand and its determinants.
Market structure final perfect competitionTej Kiran
The document discusses the characteristics of perfect competition. Key points include:
- Under perfect competition there are many small buyers and sellers of homogeneous products, with free entry and exit from the market. Firms are price takers and competition is based on price.
- In the short run, individual firms have a perfectly elastic demand curve and produce at the quantity where marginal revenue equals marginal cost, given the fixed market price.
- In the long run, firms enter and exit the industry to earn normal profits, resulting in economic equilibrium with price equal to minimum average cost for all firms.
The document discusses market structures and perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, firms that are price takers, and easy entry and exit. Under perfect competition, firms are price takers and produce where marginal revenue equals marginal cost to maximize profits. In the long run, perfect competition leads to normal profits as firms enter and exit the market.
The document discusses market structures and perfect competition. It defines a market and provides quotes defining a market. It then discusses the characteristics of perfect competition, including large numbers of buyers and sellers, homogeneous products, and perfect information. Equilibrium for a firm under perfect competition occurs where marginal cost equals marginal revenue and the marginal cost curve cuts the marginal revenue curve from below.
The document discusses the characteristics and profit maximization of firms operating under pure competition. It can be summarized as follows:
1) Under pure competition, there are many small firms, standardized products, free entry and exit of firms, and firms act as price takers.
2) In the short run, firms will produce the quantity where marginal revenue equals marginal cost to maximize profits or minimize losses.
3) In the long run, if profits exist firms will enter to increase supply and drive the price down until it equals minimum average cost, resulting in zero economic profits.
Pricing decisions under different market structuresdvy92010
This document summarizes pricing strategies under different market structures:
- Perfect competition firms are price takers and price is determined by market supply and demand.
- Perishable goods must be sold at the market price on the day, while non-perishable goods can be stored and sold when prices are higher.
- Monopolies are price makers that charge high prices to earn monopoly profits through trial and error or by setting price where marginal revenue equals marginal cost.
- Under monopolistic competition, firms set differentiated prices and the demand curve is elastic. In long run, entry of new firms eliminates economic profits.
- Oligopolies may engage in price rigidity, non-price
The document discusses the concept of perfect competition in economics. It provides the key characteristics that define a perfectly competitive market including that there are many small firms, no barriers to entry or exit, identical products, and complete information. Firms are price takers and seek to maximize profits by producing where marginal cost equals marginal revenue. In the long run, perfect competition leads to zero economic profits as new firms enter if profits are positive and firms exit if losses occur.
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
Managerial economics involves applying economic concepts and theories to help managers make sound business decisions. It examines topics like demand analysis, cost analysis, pricing decisions, and factors that influence profits. The key economic concepts covered include supply and demand, elasticity, opportunity cost, and production functions. Managerial economics aims to help managers optimize decisions given objectives and constraints to achieve goals efficiently.
Economics selection wages and discriminationtondion
a thorough analysis of the relationships between wages, workforce and productivity - issues of how to cope with discrimination related to various categories of workers
This document discusses perfect competition and its key characteristics. It can be summarized in 3 sentences:
Perfect competition is characterized by a large number of buyers and sellers, homogeneous products, free entry and exit of firms, and perfect knowledge. Under perfect competition, the interaction of supply and demand determines the equilibrium price where quantity supplied equals quantity demanded. Shifts in supply or demand curves will cause the equilibrium price to change accordingly.
This document provides information about an afterschool programme for developing social entrepreneurs. It discusses the Centre for Social Entrepreneurship's PGPSE programme, which is a comprehensive programme in social and spiritual entrepreneurship that is open and free for all.
This document provides a summary of key concepts in economics, including:
1) Firms produce goods and services while households consume them in the circular flow of economic activity.
2) Demand and supply determine market equilibrium price and quantity through interactions in product and input markets.
3) Consumer demand is influenced by price, income, wealth, tastes and expectations, while firm supply depends on price and costs.
4) Utility maximization theory explains that rational consumers seek to maximize satisfaction within their budget constraints.
Effect of Price Floor and Ceiling On AgricultureASAD ALI
Price floors and ceilings can impact industries in several ways:
1. Price ceilings below market prices can cause shortages, lower quality, wasteful lines and searches, loss of gains from trade, and misallocation of resources.
2. Price floors above market prices can cause surpluses, loss of gains from trade, wasteful increases in quality, and misallocation of resources.
3. While intended to help buyers and sellers, price controls distort market signals and eliminate incentives, leading to inefficiencies in production and consumption.
1) The document discusses the concept of perfect competition and firm equilibrium under conditions of perfect competition.
2) A key aspect of perfect competition is that there are many small producers and consumers in the market buying and selling homogeneous products, and all participants have perfect information. The market price is determined by supply and demand forces outside the control of individual firms.
3) For a firm to be in equilibrium under perfect competition, its marginal cost must equal its marginal revenue (which is equal to the market price). At this equilibrium point, the firm maximizes its profits.
4) The document contrasts the short run and long run equilibriums for firms under perfect competition and how super normal profits, normal profits
This document provides a summary of key concepts in microeconomics including:
1) The theories of demand and supply - how quantity demanded and supplied are determined based on price and other factors, and how equilibrium price is reached.
2) Elasticity - how responsive quantity is to price changes for both demand and supply. Factors that influence elasticity are discussed.
3) Applications including how minimum wage affects unemployment and how sales taxes impact producers and consumers.
4) Consumer choice theory - how preferences and budgets constrain choices to maximize utility. Individual demand curves are derived from indifference curves.
Adam Smith made important contributions to the theory of value and economic growth. Regarding value theory, he distinguished between value-in-use and value-in-exchange. Value-in-use represents the utility of an object, while value-in-exchange represents its purchasing power. Smith also analyzed how relative prices are determined by factors like labor costs, labor commanded, and total costs of production. He viewed specialization and the division of labor as central to improving productivity and driving economic growth, with the size of the market and capital accumulation also playing important roles.
Profit maximization and perfect competitionjaveria gul
1) A firm produces at the quantity where marginal revenue equals marginal cost to maximize profits. This is the point where additional revenue from producing another unit equals the additional costs.
2) A firm's profit is maximized by producing at the output level where marginal revenue equals marginal cost. Producing more would mean marginal costs exceed marginal revenues, reducing profits.
3) In the short run, a competitive firm will produce the quantity where marginal revenue equals marginal cost to maximize profits. The firm's profit is represented by the rectangle between average total cost and marginal cost at the profit-maximizing quantity.
This document introduces the concept of price elasticity of demand (PED) and related concepts. It defines PED as the responsiveness of quantity demanded to a given change in price. It explains that PED is always negative but economists often drop the negative sign for convenience. It then discusses the different categories of elasticity (elastic, inelastic, unit elastic) based on the relationship between the percentage changes in quantity demanded and price. The document also outlines factors that determine a product's PED and the relevance of understanding PED for firms' pricing, sales forecasting, and maximizing total revenue. It concludes by noting how PED varies along a demand curve and is maximized at the point of unit elasticity.
Income consumption curve,price consumption curve, engles law Ekta Doger
1. Comparative statics analysis examines how optimal decisions change when underlying assumptions, like prices or income, change.
2. Changes in prices result in new budget constraints and equilibrium points where indifference curves are tangent to the new budget lines.
3. The price consumption curve is formed by joining all the new equilibrium points and used to derive the demand curve.
4. Similarly, changes in income result in parallel shifts to the budget line and new equilibrium points joined to form the income consumption curve.
Perfect competition is an ideal market structure where many small firms produce identical goods, there are no barriers to entry or exit, and both buyers and sellers have perfect information. Under perfect competition in the long run, firms earn zero economic profit and both allocative and productive efficiency are achieved as price equals marginal cost and firms produce at minimum average total cost.
This document discusses market structures, specifically perfect competition. It defines key features of perfect competition including a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the long run, no firms earn supernormal profits and all firms earn only normal profits as entry and exit leads to equilibrium.
- Monopolistic competition refers to a market with many firms selling differentiated but similar products. Each firm faces a downward sloping demand curve and can influence prices. There is free entry and exit into the market.
- Oligopoly is characterized by a market with only a few firms selling either homogeneous or differentiated products. The firms are interdependent and can influence prices through their decisions. There is restricted entry into the market.
- Consumer surplus measures the difference between what consumers are willing to pay for a good and the actual price paid, representing the extra satisfaction consumers receive. Producer surplus is the difference between the price producers receive and the lowest price they are willing to supply at.
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
Managerial economics involves applying economic concepts and theories to help managers make sound business decisions. It examines topics like demand analysis, cost analysis, pricing decisions, and factors that influence profits. The key economic concepts covered include supply and demand, elasticity, opportunity cost, and production functions. Managerial economics aims to help managers optimize decisions given objectives and constraints to achieve goals efficiently.
Economics selection wages and discriminationtondion
a thorough analysis of the relationships between wages, workforce and productivity - issues of how to cope with discrimination related to various categories of workers
This document discusses perfect competition and its key characteristics. It can be summarized in 3 sentences:
Perfect competition is characterized by a large number of buyers and sellers, homogeneous products, free entry and exit of firms, and perfect knowledge. Under perfect competition, the interaction of supply and demand determines the equilibrium price where quantity supplied equals quantity demanded. Shifts in supply or demand curves will cause the equilibrium price to change accordingly.
This document provides information about an afterschool programme for developing social entrepreneurs. It discusses the Centre for Social Entrepreneurship's PGPSE programme, which is a comprehensive programme in social and spiritual entrepreneurship that is open and free for all.
This document provides a summary of key concepts in economics, including:
1) Firms produce goods and services while households consume them in the circular flow of economic activity.
2) Demand and supply determine market equilibrium price and quantity through interactions in product and input markets.
3) Consumer demand is influenced by price, income, wealth, tastes and expectations, while firm supply depends on price and costs.
4) Utility maximization theory explains that rational consumers seek to maximize satisfaction within their budget constraints.
Effect of Price Floor and Ceiling On AgricultureASAD ALI
Price floors and ceilings can impact industries in several ways:
1. Price ceilings below market prices can cause shortages, lower quality, wasteful lines and searches, loss of gains from trade, and misallocation of resources.
2. Price floors above market prices can cause surpluses, loss of gains from trade, wasteful increases in quality, and misallocation of resources.
3. While intended to help buyers and sellers, price controls distort market signals and eliminate incentives, leading to inefficiencies in production and consumption.
1) The document discusses the concept of perfect competition and firm equilibrium under conditions of perfect competition.
2) A key aspect of perfect competition is that there are many small producers and consumers in the market buying and selling homogeneous products, and all participants have perfect information. The market price is determined by supply and demand forces outside the control of individual firms.
3) For a firm to be in equilibrium under perfect competition, its marginal cost must equal its marginal revenue (which is equal to the market price). At this equilibrium point, the firm maximizes its profits.
4) The document contrasts the short run and long run equilibriums for firms under perfect competition and how super normal profits, normal profits
This document provides a summary of key concepts in microeconomics including:
1) The theories of demand and supply - how quantity demanded and supplied are determined based on price and other factors, and how equilibrium price is reached.
2) Elasticity - how responsive quantity is to price changes for both demand and supply. Factors that influence elasticity are discussed.
3) Applications including how minimum wage affects unemployment and how sales taxes impact producers and consumers.
4) Consumer choice theory - how preferences and budgets constrain choices to maximize utility. Individual demand curves are derived from indifference curves.
Adam Smith made important contributions to the theory of value and economic growth. Regarding value theory, he distinguished between value-in-use and value-in-exchange. Value-in-use represents the utility of an object, while value-in-exchange represents its purchasing power. Smith also analyzed how relative prices are determined by factors like labor costs, labor commanded, and total costs of production. He viewed specialization and the division of labor as central to improving productivity and driving economic growth, with the size of the market and capital accumulation also playing important roles.
Profit maximization and perfect competitionjaveria gul
1) A firm produces at the quantity where marginal revenue equals marginal cost to maximize profits. This is the point where additional revenue from producing another unit equals the additional costs.
2) A firm's profit is maximized by producing at the output level where marginal revenue equals marginal cost. Producing more would mean marginal costs exceed marginal revenues, reducing profits.
3) In the short run, a competitive firm will produce the quantity where marginal revenue equals marginal cost to maximize profits. The firm's profit is represented by the rectangle between average total cost and marginal cost at the profit-maximizing quantity.
This document introduces the concept of price elasticity of demand (PED) and related concepts. It defines PED as the responsiveness of quantity demanded to a given change in price. It explains that PED is always negative but economists often drop the negative sign for convenience. It then discusses the different categories of elasticity (elastic, inelastic, unit elastic) based on the relationship between the percentage changes in quantity demanded and price. The document also outlines factors that determine a product's PED and the relevance of understanding PED for firms' pricing, sales forecasting, and maximizing total revenue. It concludes by noting how PED varies along a demand curve and is maximized at the point of unit elasticity.
Income consumption curve,price consumption curve, engles law Ekta Doger
1. Comparative statics analysis examines how optimal decisions change when underlying assumptions, like prices or income, change.
2. Changes in prices result in new budget constraints and equilibrium points where indifference curves are tangent to the new budget lines.
3. The price consumption curve is formed by joining all the new equilibrium points and used to derive the demand curve.
4. Similarly, changes in income result in parallel shifts to the budget line and new equilibrium points joined to form the income consumption curve.
Perfect competition is an ideal market structure where many small firms produce identical goods, there are no barriers to entry or exit, and both buyers and sellers have perfect information. Under perfect competition in the long run, firms earn zero economic profit and both allocative and productive efficiency are achieved as price equals marginal cost and firms produce at minimum average total cost.
This document discusses market structures, specifically perfect competition. It defines key features of perfect competition including a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. In the long run, no firms earn supernormal profits and all firms earn only normal profits as entry and exit leads to equilibrium.
- Monopolistic competition refers to a market with many firms selling differentiated but similar products. Each firm faces a downward sloping demand curve and can influence prices. There is free entry and exit into the market.
- Oligopoly is characterized by a market with only a few firms selling either homogeneous or differentiated products. The firms are interdependent and can influence prices through their decisions. There is restricted entry into the market.
- Consumer surplus measures the difference between what consumers are willing to pay for a good and the actual price paid, representing the extra satisfaction consumers receive. Producer surplus is the difference between the price producers receive and the lowest price they are willing to supply at.
This document provides an overview of macroeconomic theory regarding short-term fluctuations in output and employment (i.e. the business cycle) using aggregate demand/aggregate supply models. It explains that in the short-run, prices are sticky but flexible in the long-run, leading to different aggregate supply curves (SRAS, LRAS). The AD/AS framework is used to analyze how demand and supply shocks can cause fluctuations and how stabilization policy aims to minimize changes in output and employment.
This document provides a summary of key concepts from Chapter 5 of an economics textbook on macroeconomics and the open economy. It includes national income accounting identities, the relationship between saving, investment, and the trade balance, and how fiscal policy, interest rates, and exchange rates impact trade balances. Graphs and equations are presented to illustrate these international macroeconomic concepts.
This document outlines the United Nations Environment Programme's (UNEP) "Green Economy Initiative" which aims to promote a global transition to a low-carbon, resource efficient "green economy" through various initiatives and reports. The initiative will demonstrate the economic opportunities of investing in green sectors like renewable energy and green jobs. It will also evaluate the value of ecosystem services and make policy recommendations. The initiative will engage global policy processes and foster consensus on green economy concepts through regional collaborations and country technical assistance.
The document discusses the monetary system and the role of money and central banking. It describes how money serves as a medium of exchange, unit of account, and store of value. It explains how the Federal Reserve regulates the US monetary system by controlling the money supply through tools like open market operations, reserve requirements, and interest rates. It also discusses how fractional-reserve banking allows banks to create money when they issue loans.
1. The document discusses the Phillips curve, which shows the relationship between inflation and unemployment that policymakers must consider. It demonstrates how expected inflation, cyclical unemployment, and supply shocks impact the rate of inflation.
2. The Phillips curve is derived from aggregate supply theory. It states that inflation depends on past inflation, how far unemployment is from its natural rate, and supply shock shocks. This explains inflation's tendency to persist, or inertia.
3. In the short run, policymakers can use fiscal and monetary policy to influence demand and affect inflation and unemployment, following a tradeoff shown by the Phillips curve. However, in the long run inflation is determined by expectations and unemployment returns to the natural rate
This document discusses five debates around macroeconomic policy:
1) Whether policymakers should try to stabilize the economy or not intervene due to lags and uncertainty.
2) Whether monetary policy should follow rules or have discretion.
3) Whether the central bank should target zero inflation.
4) Whether the government should balance its budget or not.
5) Whether tax laws should encourage saving more.
For each debate, the perspectives of advocates and critics are presented.
The document discusses how monetary and fiscal policy can influence aggregate demand. It explains that monetary policy works through interest rates, affecting money supply and demand. Fiscal policy involves changing government spending and taxes. Both can shift aggregate demand curves, countering economic fluctuations. However, policy effects are debated as actions may lag and destabilize the economy. The multiplier amplifies fiscal policy while crowding-out dampens its effects. Overall, the document provides an overview of how and why governments use monetary and fiscal tools to stabilize output and employment.
This document provides an overview of short-run economic fluctuations by discussing key concepts like aggregate demand, aggregate supply, and the business cycle. It notes that most macroeconomic variables fluctuate together in the short-run as the economy expands and contracts. The document also introduces the basic model of aggregate demand and aggregate supply to explain these fluctuations, showing how the AD curve slopes downward and the AS curve slopes upward in the short-run due to various factors like price rigidities. It explores how shifts in AD and AS can affect output and inflation in both the short-run and long-run.
This document discusses macroeconomic models of open economies. It covers key variables like net exports and exchange rates. It describes the markets for loanable funds and foreign currency exchange. The supply of and demand for loanable funds depends on the interest rate and determines investment levels. The foreign exchange market balances supply of dollars for exports with demand for imports. Government deficits reduce savings and increase interest rates, crowding out investment. Trade policies like tariffs impact exchange rates but not overall trade balances. Political instability can cause capital flight, raising rates and depreciating currencies.
The document discusses several key concepts related to unemployment:
1) It defines different types of unemployment including frictional unemployment from job searching, structural unemployment from skills mismatches, and cyclical unemployment from economic downturns.
2) Factors that contribute to natural unemployment are discussed, including the time needed to match workers and jobs (frictional) and minimum wages creating surpluses.
3) Unions are also examined as creating above-market wages for some workers which prices others out of jobs.
4) The concept of efficiency wages is introduced where higher pay can boost productivity and lower costs in the long-run.
The document discusses money supply and money demand. It explains that money supply is determined by the behavior of households, banks, and the Federal Reserve. Banks can create money through fractional-reserve banking by keeping only a fraction of deposits as reserves and lending out the rest. This allows the initial deposit to create additional money in the economy. The money supply and monetary base are also influenced by the reserve-deposit ratio, currency-deposit ratio, and money multiplier. The Federal Reserve can conduct open market operations and adjust reserve requirements and interest rates to influence the money supply. Money demand theories, including portfolio and transactions theories like the Baumol-Tobin model, are also covered.
The document discusses several economic models that can explain the short-run tradeoff between inflation and unemployment:
1) The sticky-price model where prices adjust slowly, creating a temporary tradeoff as output responds to unexpected price changes.
2) The imperfect-information model where suppliers make temporary mistakes about prices due to imperfect information.
3) The Phillips curve models the relationship between inflation, expected inflation, unemployment, and supply shocks.
Macro Economics -II Chapter Two AGGREGATE SUPPLYZegeye Paulos
1) The document discusses four models of short-run aggregate supply: the sticky-price model, imperfect information model, and sticky-wage model.
2) In the sticky-price model, some prices are fixed in the short-run due to contracts or costs of changing prices. This can cause output to deviate from natural levels when demand changes.
3) The imperfect information model assumes suppliers don't know the overall price level when making decisions. Output will rise if actual prices are above expected prices.
4) In the sticky-wage model, nominal wages are fixed by contracts in the short-run. A price rise will lower real wages and induce firms to hire more workers and produce more output
The document summarizes three models of aggregate supply and the relationship between inflation and unemployment known as the Phillips curve. The models are the sticky-wage, imperfect-information, and sticky-price models. It also discusses how expectations are formed, the short-run tradeoff in the Phillips curve, and the costs of reducing inflation through contractionary policy.
This document provides an overview of Chapter 13 from a macroeconomics textbook. It discusses three models of aggregate supply: the sticky-wage model, imperfect-information model, and sticky-price model. All three models imply a short-run tradeoff between inflation and unemployment known as the Phillips curve. The chapter also examines how the Phillips curve can shift due to changes in expected inflation and how disinflation policies require sacrificing output to reduce unemployment below the natural rate. Rational expectations theory suggests credible disinflation may require little output sacrifice.
The document discusses aggregate supply, which is the relationship between the price level and the quantity of output firms are willing to supply. It examines aggregate supply from both short-run and long-run perspectives. In the short-run, aggregate supply is upward-sloping as input prices like wages are sticky. In the long-run, costs adjust fully to price level changes, making aggregate supply vertical. The aggregate supply curve can shift due to cost changes from factors like input prices, technology, or policies.
A Revision Of The Theory Of Perfect Competition And Of ValuePedro Craggett
1) The classic economic theory of perfect competition is built on the flawed assumption that individual firms face perfectly elastic (horizontal) demand curves. This paper argues this assumption is incorrect and leads to inconsistencies.
2) In reality, individual firm demand curves are sloped and sum to the market demand curve. Equilibrium should be determined by the intersection of total marginal costs and total marginal revenue derived from the demand curve, not total supply and demand.
3) With sloped individual demand curves, the market exhibits monopolistic characteristics even under perfect competition. Firms share the total profits of the industry. Entry and exit leads to zero economic profits in long run equilibrium, not perfectly competitive assumptions of the classic theory.
This document provides an overview of various topics in economics including microeconomics, macroeconomics, finance, supply and demand, government interventions, elasticity, costs, market structures, pricing theory, consumer behavior, regulation, fiscal policy, monetary policy, and income distribution. It defines key terms and concepts within each topic at a high level.
This paper develops a model of trade driven by economies of scale at the firm level, rather than differences in technology or endowments. With internal scale economies, markets exhibit monopolistic competition. The model shows that trade and gains from trade can occur between identical countries. Growth increases welfare by raising real wages and variety. Opening trade between identical countries has the same effect as growth, increasing scale, variety, and welfare in both places through balanced trade. Factor mobility acts as a substitute for trade.
This document provides an overview of aggregate supply and the short-run tradeoff between inflation and unemployment known as the Phillips curve. It discusses three models of aggregate supply - the sticky-wage model, imperfect-information model, and sticky-price model - and how they each imply a positive relationship between output and the price level in the short run. The Phillips curve relationship is then derived from the aggregate supply relationship. The document also discusses concepts like adaptive expectations, inflation inertia, cost-push vs demand-pull inflation, and the sacrifice ratio.
This document provides a summary of a lecture on supply and demand. It discusses key concepts including:
- The supply and demand model which looks at interactions between buyers and sellers.
- Perfect and imperfect competition in markets.
- The law of demand which states that as price increases, quantity demanded decreases.
- Supply curves which show the relationship between quantity supplied and price, and how supply can shift due to changes in factors of production.
- Market equilibrium where supply and demand are equal and there is no incentive for prices to change.
The document discusses key macroeconomic concepts including:
1. Microeconomics focuses on supply and demand forces at the individual firm or industry level, while macroeconomics looks at economy-wide phenomena like GDP.
2. Excess demand occurs when price is below the equilibrium price, resulting in demand exceeding supply.
3. Consumer surplus and producer surplus represent the benefits consumers and producers realize from buying and selling goods.
4. Full employment refers to an acceptable level of natural unemployment that controls inflation, often defined as the non-accelerating inflation rate of unemployment (NAIRU).
5. Government expenditure includes final consumption, investment, and transfer payments by the state.
Price determination via the market mechanismHugo OGrady
Price determination via the market mechanism content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.
Subtopics:
The Price Market Mechanism & Market Equilibrium
The Impact of changes in Demand & Supply on Equilibrium
The Functions of the Price Mechanism
The Effectiveness of Markets in Allocating Resources
This document discusses the economic concepts of supply and demand. It defines supply and demand as the relationship between price and quantity in a competitive market. The supply curve shows the quantity supplied at different prices, and the demand curve shows quantity demanded. Where the supply and demand curves intersect is the equilibrium price and quantity, where quantity supplied equals quantity demanded. The document discusses how shifts in supply or demand curves due to changes in costs, incomes, prices of related goods, etc. impact the equilibrium price and quantity in the market.
The document discusses demand and supply curves, including how they are determined and how they can shift. It also covers market equilibrium and how prices and quantities are set where supply meets demand. Key factors that can cause shifts in supply and demand are discussed, including price changes, income changes, cost of production changes, and government policies like taxes and subsidies. The impacts of these policies on consumer surplus, producer surplus, and deadweight loss are analyzed through examples using supply and demand diagrams.
Fundamental and technical analysis are two techniques used to forecast commodity prices. Fundamental analysis examines underlying economic and political factors that influence supply and demand to predict price movements. It involves gathering data on factors such as inventories, policies, and economic indicators. Technical analysis focuses on historical price and trading volume patterns to identify trends. Traders use various fundamental and technical strategies and analyze risk to successfully manage trading positions.
This document discusses regression analysis techniques for estimating relationships between variables. It provides examples of using single and multiple regression to model how dependent variables, like income, are impacted by independent variables, such as education levels and population density. Key outputs from regression analyses like the model summary, ANOVA table, and coefficients are also presented to interpret the results and significance of relationships.
This document provides an overview of aggregate demand and aggregate supply concepts in macroeconomics. It defines key terms like aggregate demand curve, aggregate supply curve, equilibrium output and price level. It explains how shifts in aggregate demand and aggregate supply due to factors like money supply changes, government policies, supply shocks etc. affect equilibrium output and price level in both short-run and long-run. The document also discusses concepts like Keynesian and classical aggregate supply curves, supply-side economics and price adjustment mechanism.
Why You Should Replace Windows 11 with Nitrux Linux 3.5.0 for enhanced perfor...SOFTTECHHUB
The choice of an operating system plays a pivotal role in shaping our computing experience. For decades, Microsoft's Windows has dominated the market, offering a familiar and widely adopted platform for personal and professional use. However, as technological advancements continue to push the boundaries of innovation, alternative operating systems have emerged, challenging the status quo and offering users a fresh perspective on computing.
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13 1 aggregate supply
1. Chapter Thirteen 1
A PowerPoint™Tutorial
to Accompany macroeconomics, 5th ed.
N. Gregory Mankiw
®
Aggregate Supply
2. Chapter Thirteen 2
When we introduced the aggregate supply curve of chapter 9, we
established that aggregate supply behaves differently in the short run
than in the long run. In the long run, prices are flexible, and the
aggregate supply curve is vertical. When the aggregate supply curve is
vertical, shifts in the aggregate demand curve affect the price level, but
the output of the economy remains at its natural rate. By contrast, in
the short run, prices are sticky, and the aggregate supply curve is not
vertical. In this case, shifts in aggregate demand do cause fluctuations
in output. In chapter 9, we took a simplified view of price stickiness
by drawing the short-run aggregate supply curve as a horizontal line,
representing the extreme situation in which all prices are fixed. So,
now we’ll refine our understanding of short-run aggregate supply.
When we introduced the aggregate supply curve of chapter 9, we
established that aggregate supply behaves differently in the short run
than in the long run. In the long run, prices are flexible, and the
aggregate supply curve is vertical. When the aggregate supply curve is
vertical, shifts in the aggregate demand curve affect the price level, but
the output of the economy remains at its natural rate. By contrast, in
the short run, prices are sticky, and the aggregate supply curve is not
vertical. In this case, shifts in aggregate demand do cause fluctuations
in output. In chapter 9, we took a simplified view of price stickiness
by drawing the short-run aggregate supply curve as a horizontal line,
representing the extreme situation in which all prices are fixed. So,
now we’ll refine our understanding of short-run aggregate supply.
3. Chapter Thirteen 3
Let’s now examine three prominent models of aggregate supply, roughly
in the order of their development. In all the models, some market
imperfection causes the output of the economy to deviate from its
classical benchmark. As a result, the short-run aggregate supply curve
is upward sloping, rather than vertical, and shifts in the aggregate
demand curve cause the level of output to deviate temporarily from
the natural rate. These temporary deviations represent the booms and
busts of the business cycle.
Although each of the three models takes us down a different theoretical
route, each route ends up in the same place. That final destination is a
short-run aggregate supply equation of the form…
4. Chapter Thirteen 4
Y = Y + α (P-Pe
) where α > 0
Output
Actual price level
positive constant:
an indicator of
how much
output responds
to unexpected
changes in the
price level.
Natural
rate of output
Expected
price level
This equation states that output deviates from its natural rate when the
price level deviates from the expected price level. The parameter α
indicates how much output responds to unexpected changes in the price
level, 1/α is the slope of the aggregate supply curve.
5. Chapter Thirteen 5
The sticky-wage model shows what a sticky nominal wage implies for
aggregate supply. To preview the model, consider what happens to the
amount of output produced when the price level rises:
1) When the nominal wage is stuck, a rise in the price level lowers the
real wage, making labor cheaper.
2) The lower real wage induces firms to hire more labor.
3) The additional labor hired produces more output.
This positive relationship between the price level and the amount of
output means the aggregate supply curve slopes upward during the time
when the nominal wage cannot adjust.
The workers and firms set the nominal wage W based on the target real
wage ω and on their expectation of the price level Pe
. The nominal wage
they set is:
W = ω × Pe
Nominal Wage = Target Real Wage × Expected Price Level
6. Chapter Thirteen 6
W/P = ω × (Pe
/P)
Real Wage=Target Real Wage ×(Expected Price Level/Actual Price Level)
This equation shows that the real wage deviates from its target if the
actual price level differs from the expected price level. When the actual
price level is greater than expected, the real wage is less than its target;
when the actual price level is less than expected, the real wage is greater
than its target.
The final assumption of the sticky-wage model is that employment is
determined by the quantity of labor that firms demand. In other words,
the bargain between the workers and the firms does not determine the
level of employment in advance; instead, the workers agree to provide
as much labor as the firms wish to buy at the predetermined wage. We
describe the firms’ hiring decisions by the labor demand function:
L = Ld
(W/P),
which states that the lower the real wage, the more labor firms hire and
output is determined by the production function Y = F(L).
7. Chapter Thirteen 7
Labor, L
Y = F(L)
Income, Output, Y
Labor, L
L = Ld
(W/P)
Y=Y+α(P-Pe
)
realwage,W/P
Income,Output,YPricelevel,P
An increase in the price level,
reduces the real wage for a given
nominal wage, which raises
employment and output and
income.
An increase in the price level,
reduces the real wage for a given
nominal wage, which raises
employment and output and
income.
8. Chapter Thirteen 8
The second explanation for the upward slope of the short-run aggregate
supply curve is called the imperfect-information model. Unlike the
sticky-wage model, this model assumes that markets clear-- that is, all
wages and prices are free to adjust to balance supply and demand. In this
model, the short-run and long-run aggregate supply curves differ because
of temporary misperceptions about prices.
The imperfect-information model assumes that each supplier in the
economy produces a single good and consumes many goods. Because the
number of goods is so large, suppliers cannot observe all prices at all
times. They monitor the prices of their own goods but not the prices of all
goods they consume. Due to imperfect information, they sometimes
confuse changes in the overall price level with changes in relative prices.
This confusion influences decisions about how much to supply, and it
leads to a positive relationship between the price level and output in the
short run.
9. Chapter Thirteen 9
Let’s consider the decision of a single wheat producer, who earns income
from selling wheat and uses this income to buy goods and services. The
amount of wheat she chooses to produce depends on the price of wheat
relative to the prices of other goods and services in the economy. If the
relative price of wheat is high, she works hard and produces more wheat.
If the relative price of wheat is low, she prefers to work less and produce
less wheat. The problem is that when the farmer makes her production
decision, she does not know the relative price of wheat. She knows the
nominal price of wheat, but not the price of every other good in the
economy. She estimates the relative price of wheat using her expectations
of the overall price level.
If there is a sudden increase in the price level, the farmer doesn’t know if it
is a change in overall prices or just the price of wheat. Typically, she will
assume that it is a relative price increase and will therefore increase the
production of wheat. Most suppliers will tend to make this mistake.
To sum up, the notion that output deviates from the natural rate when the
price level deviates from the expected price level is captured by:
Y = Y + α(P-Pe
)
10. Chapter Thirteen 10
A third explanation for the upward-sloping short-run aggregate supply
curve is called the sticky-price model. This model emphasizes that firms
do not instantly adjust the prices they charge in response to changes in
demand. Sometimes prices are set by long-term contracts between firms
and consumers.
To see how sticky prices can help explain an upward-sloping aggregate
supply curve, first consider the pricing decisions of individual firms
and then aggregate the decisions of many firms to explain the economy
as a whole. We will have to relax the assumption of perfect competition
whereby firms are price takers. Now they will be price setters.
11. Chapter Thirteen 11
Consider the pricing decision faced by a typical firm. The firm’s
desired price p depends on two macroeconomic variables:
1) The overall level of prices P. A higher price level implies that the
firm’s costs are higher. Hence, the higher the overall price level, the
more the firm will like to charge for its product.
2) The level of aggregate income Y. A higher level of income raises
the demand for the firm’s product. Because marginal cost increases at
higher levels of production, the greater the demand, the higher the
firm’s desired price.
The firm’s desired price is:
p = P + a(Y-Y)
This equations states that the desired price p depends on the overall
level of prices P and on the level of aggregate demand relative to its
natural rate Y-Y. The parameter a (which is greater than 0) measures
how much the firm’s desired price responds to the level of aggregate
output.
12. Chapter Thirteen 12
Now assume that there are two types of firms. Some have flexible prices:
they always set their prices according to this equation. Others have sticky
prices: they announce their prices in advance based on what they expect
economic conditions to be. Firms with sticky prices set prices according to
p = Pe
+ a(Ye
- Ye
),
where the superscript ‘e’ represents the expected value of a variable. For
simplicity, assume these firms expect output to be at its natural rate so
that the last term a(Ye
- Ye
), drops out. Then these firms set price so
that p = Pe
. That is, firms with sticky prices set their prices based on what
they expect other firms to charge.
We can use the pricing rules of the two groups of firms to derive the
aggregate supply equation. To do this, we find the overall price level in the
economy as the weighted average of the prices set by the two groups.
After some manipulation, the overall price level is:
P = Pe
+ [(1-s)a/s](Y-Y)]
13. Chapter Thirteen 13
P = Pe
+ [(1-s)a/s](Y-Y)]
The two terms in this equation are explained as follows:
1) When firms expect a high price level, they expect high costs. Those
firms that fix prices in advance set their prices high. These high prices
cause the other firms to set high prices also. Hence, a high expected price
level Pe
leads to a high actual price level P.
2) When output is high, the demand for goods is high. Those firms
with flexible prices set their prices high, which leads to a high price level.
The effect of output on the price level depends on the proportion of firms
with flexible prices. Hence, the overall price level depends on the
expected price level and on the level of output. Algebraic rearrangement
puts this aggregate pricing equation into a more familiar form:
where α = s/[(1-s)a]. Like the other models, the sticky-price model says
that the deviation of output from the natural rate is positively associated
with the deviation of the price level from the expected price level.
Y = Y + α(P-Pe
)
14. Chapter Thirteen 14
Start at point A; the economy is at full employment Y and the
actual price level is P0. Here the actual price level equals the
expected price level. Now let’s suppose we increase the price
level to P1.
Since P (the actual price level) is now greater than Pe
(the
expected price level) Y will rise above the natural rate, and we
slide along the SRAS(Pe
=P0)curve to A' .
Remember that our new SRAS (Pe
=P0) curve is defined by the
presence of fixed expectations (in this case at P0). So in terms
of the SRAS equation, when P rises to P1, holding Pe
constant
at P0, Y must rise.
The “long-run” will be defined when the expected price level equals the actual price level. So, as price level
expectations adjust, Pe
⇒P2, we’ll end up on a new short-run aggregate supply curve, SRAS (Pe
=P2) at point B.
Hooray! We made it back to LRAS, a situation characterized by perfect information where the actual price
level (now P2) equals the expected price level (also, P2).
↑Y = Y + α (↑P-Pe
)
Y = Y + α (P-Pe
)
Y = Y + α (↑P-↑Pe
)
In terms of the SRAS equation, we can see that as Pe
catches up with P, that entire “expectations gap”
disappears and we end up on the long run aggregate supply curve at full employment where Y = Y.
SRAS (Pe
=P2)
BP2
A'
Y'
SRAS (Pe
=P0)
P
Output
A
P0
LRAS*
Y
AD
AD'
P1
15. Chapter Thirteen 15
The Phillips curve in its modern form states that the inflation rate
depends on three forces:
1) Expected inflation
2) The deviation of unemployment from the natural rate, called
cyclical unemployment
3) Supply shocks
These three forces are expressed in the following equation:
π = πe
−β(µ−µn
) + ν
Inflation β × Cyclical
Unemployment
Supply
Shock
Expected
Inflation
16. Chapter Thirteen 16
The Phillips-curve equation and the short-run aggregate supply equation
represent essentially the same macroeconomic ideas. Both equations
show a link between real and nominal variables that causes the
classical dichotomy (the theoretical separation of real and nominal
variables) to break down in the short run.
The Phillips curve and the aggregate supply curve are two sides of the
same coin. The aggregate supply curve is more convenient when
studying output and the price level, whereas the Phillips curve
is more convenient when studying unemployment and inflation.
17. Chapter Thirteen 17
To make the Phillips curve useful for analyzing the choices facing
policymakers, we need to say what determines expected inflation. A
simple often plausible assumption is that people form their expectations
of inflation based on recently observed inflation. This assumption is
called adaptive expectations. So, expected inflation πe
equals last year’s
inflation π-1. In this case, we can write the Phillips curve as:
which states that inflation depends on past inflation, cyclical
unemployment, and a supply shock. When the Phillips curve is written in
this form, it is sometimes called the Non-Accelerating Inflation Rate of
Unemployment, or NAIRU.
The term π-1 implies that inflation has inertia-- meaning that it keeps going
until something acts to stop it. In the model of AD/AS, inflation inertia
is interpreted as persistent upward shifts in both the aggregate supply
curve and aggregate demand curve. Because the position of the SRAS
will shift upwards overtime, it will continue to shift upward until
something changes inflation expectations.
π = π-1 −β(µ−µn
) + ν
18. Chapter Thirteen 18
The second and third terms in the Phillips-curve equation show the two
forces that can change the rate of inflation. The second term, β(u-un
),
shows that cyclical unemployment exerts downward pressure on inflation.
Low unemployment pulls the inflation rate up. This is called
demand-pull inflation because high aggregate demand is responsible for
this type of inflation. High unemployment pulls the inflation rate down.
The parameter β measures how responsive inflation is to cyclical
unemployment. The third term, ν shows that inflation also rises and falls
because of supply shocks. An adverse supply shock, such as the rise in
world oil prices in the 70’s, implies a positive value of ν and causes
inflation to rise.
This is called cost-push inflation because adverse supply shocks are
typically events that push up the costs of production. A beneficial
supply shock, such as the oil glut that led to a fall in oil prices in the
80’s, makes ν negative and causes inflation to fall.
19. Chapter Thirteen 19
un
π
Unemployment, u
πe
+ ν
In the short run, inflation and unemployment
are negatively related. At any point in time, a
policymaker who controls aggregate demand
can choose a combination of inflation and
unemployment on this short-run Phillips
curve.
In the short run, inflation and unemployment
are negatively related. At any point in time, a
policymaker who controls aggregate demand
can choose a combination of inflation and
unemployment on this short-run Phillips
curve.
20. Chapter Thirteen 20
un
Π
Unemployment, u
LRPC (u=un
)
5%
10%
SRPC (Πe
=0%)
SRPC (Πe
=10%)
SRPC (Πe
=5%)
D
B C
E
Suppose there is an increase in the rate of growth of the money supply causing LM and AD to shift out
resulting in an unexpected increase in inflation. The Phillips curve equation Π = Πe
– β(u-un
) + v implies
that the change in inflation misperceptions causes unemployment to decline. So, the economy moves to a
point above full employment at point B.
A
As long as this inflation misperception exists, the economy will
remain below its natural rate un
at u'.
Let’s start at point A, a point of price stability (Π=0%) and full employment (u=un
).
When the economic agents realize the new level of inflation, they
will end up on a new short-run Phillips curve where expected
inflation equals the new rate of inflation (5%) at point C, where
actual inflation (5%) equals expected inflation (5%).
Remember, each short-run Phillips curve is defined by the presence of fixed expectations.
If the monetary authorities opt to obtain a lower u again,
then they will increase the money supply such that Π is
10%, for example. The economy moves to point D, where
actual inflation is 10% but, Πe
is 5%.
When expectations adjust, the
economy will land on a new SRPC, at
point E, where both Π and Πe
equal
10%.
u'
21. Chapter Thirteen 21
Rational expectations make the assumption that people optimally use all
the available information about current government policies, to forecast
the future. According to this theory, a change in monetary or fiscal
policy will change expectations, and an evaluation of any policy change
must incorporate this effect on expectations. If people do form their
expectations rationally, then inflation may have less inertia than it first
appears.
Proponents of rational expectations argue that the short-run Phillips
curve does not accurately represent the options that policymakers have
available. They believe that if policy makers are credibly committed to
reducing inflation, rational people will understand the commitment and
lower their expectations of inflation. Inflation can then come down
without a rise in unemployment and fall in output.
22. Chapter Thirteen 22
Our entire discussion has been based on the natural rate hypothesis.
The hypothesis is summarized in the following statement:
Fluctuations in aggregate demand affect output and employment only
in the short run. In the long run, the economy returns to the levels of
output,employment, and unemployment described by the classical model.
Recently, some economists have challenged the natural-rate hypothesis
by suggesting that aggregate demand may affect output and employment
even in the long run. They have pointed out a number of mechanisms
through which recessions might leave permanent scars on the economy
by altering the natural rate of unemployment. Hyteresis is the term
used to describe the long-lasting influence of history on the natural
rate.
23. Chapter Thirteen 23
Sticky-wage model
Imperfect-information model
Sticky-price model
Phillips curve
Adaptive expectations
Demand-pull inflation
Cost-push inflation
Sacrifice ratio
Rational expectations
Natural-rate hypothesis
Hyteresis
Sticky-wage model
Imperfect-information model
Sticky-price model
Phillips curve
Adaptive expectations
Demand-pull inflation
Cost-push inflation
Sacrifice ratio
Rational expectations
Natural-rate hypothesis
Hyteresis