8 Chapter 7: The Analysis of Price Determination Gang gong Copyright Notes: This electronic file is only used as a lecture notes for the student in this class It is not allowed to be sed for presentation anywhere else without the permission from the author
Chapter 7: The Analysis of Price Determination Gang Gong Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author
Introduction The objective of this chapter is to discuss z 2o, how price is determined in Keynesian analysis some textbooks would like to refer the analysis in this chapter as the medium analysis in contrast to short run analysis This is because in the short run the price is Bs assumed to be fixed, and therefore nothing we can say about the price determination
Introduction • The objective of this chapter is to discuss how price is determined in Keynesian analysis. • Some textbooks would like to refer the analysis in this chapter as the medium analysis in contrast to short run analysis. This is because in the short run the price is assumed to be fixed, and therefore nothing we can say about the price determination
Introduction · Generally speaking, Keynesian economics多 e does not exclude the market condition (excess demand or supply) as a factor to determine price. Yet in addition to the market condition, the cost of production is also important in price determination. This seems to be contrast to the neo and new classical analysis according to which only the first is emphasized.%
Introduction • Generally speaking, Keynesian economics does not exclude the market condition (excess demand or supply) as a factor to determine price. Yet in addition to the market condition, the cost of production is also important in price determination. This seems to be contrast to the Neo and New classical analysis according to which only the first is emphasized
Wage Determination 22 In reality wage may set by many ways 221- Collective bargaining between firms and union may be one way he government may set up a minimum wage rate Firms may simply decide a wage rate according to the market condition Or a firm may even pay an efficiency wage( the wage level beyond the condition to keep the worker work efficiently
Wage Determination • In reality, wage may set by many ways. – Collective bargaining between firms and union may be one way. – The government may set up a minimum wage rate. – Firms may simply decide a wage rate according to the market condition. – Or a firm may even pay an efficiency wage (the wage level beyond the condition) to keep the worker work efficiently
Wage Determination 22 Generally, one could have the following y 2p equation regarding the wage determination: o w=Pg(u,z) where pe is the expected price, u is the unemployment rate and z represent other factors. In particular, one could assume pe=P
Wage Determination • Generally, one could have the following equation regarding the wage determination: • where is the expected price, u is the unemployment rate and z represent other factors. In particular, one could assume W P g(u,z) e = e P P P e =
Wage Determination 22 Note that the above way of wage or determination capture our two basic forces (market condition and cost)in determination of price. h
Wage Determination • Note that the above way of wage determination capture our two basic forces (market condition and cost) in determination of price
p Price Determination 2( p In macroeconomics, the cost of a product in 2 general is reflected by the wage. Therefore one could write the price equation as 多P=(W+q)(1+()多 where g could be regarded as the production cost other than wage; u the markup over the cost W+q
Price Determination • In macroeconomics, the cost of a product in general is reflected by the wage. Therefore one could write the price equation as P = (W+q)(1+µ) where q could be regarded as the production cost other than wage; µ the markup over the cost W+q
p Price Determination 2( p It should be noted that there is no reason to 2p believe u and g are always fixed One could think of u as being a reflection of the market condition in general industry while q as being determined by import price, change in productivity among others. All these can be regarded as supply shock
Price Determination • It should be noted that there is no reason to believe µ and q are always fixed. One could think of µ as being a reflection of the market condition in general industry while q as being determined by import price, change in productivity among others. All these can be regarded as supply shock
p Price Determination 2( p There is no reason to believe u is fixed. sA 2 Indeed, one could think of u as being a 5 reflection of the market condition in general indust Thus, given the unemployment rate, one could determine the price and wage simultaneously by the wage and price equations
Price Determination • There is no reason to believe µ is fixed. Indeed, one could think of µ as being a reflection of the market condition in general industry. • Thus, given the unemployment rate, one could determine the price and wage simultaneously by the wage and price equations
Putting All Markets Together We are now ready to put all markets together and construct a hypothetical general equilibrium model with one industry
Putting All Markets Together • We are now ready to put all markets together and construct a hypothetical “general” equilibrium model with one industry: