L10._The_determination_of_wages__prices_and_supply

What does the expected real wage equation account for when workers negotiate salaries?

It considers the expected price level (Pe) and factors like the number of workers hired (N) and institutional influences (z).

How do firms set their prices in markets where they don’t face much competition?

Firms set prices above their average costs (P = (1 + µ)W), where W is the wage they pay workers, and µ (mu) represents the mark-up or profit margin added to the cost.

What does the expected real wage equation account for when workers negotiate salaries?

It considers the expected price level (Pe) and factors like the number of workers hired (N) and institutional influences (z).

How do firms set their prices in markets where they don’t face much competition?

Firms set prices above their average costs (P = (1 + µ)W), where W is the wage they pay workers, and µ (mu) represents the mark-up or profit margin added to the cost.

How is the real wage rate (w) related to the level of output produced?

It rises as the amount of goods or services produced (Y) increases. This relationship can be shown by the equation: W/P = (Pe/P)f(Y/Φ, z) where W is nominal wage and P is current price level.

What does the aggregate supply equation show about the connection between price level and output?

It shows that a rise in the price level (P) generally increases total output (Y), assuming other factors like expected price level (Pe), mark-up (µ), productivity (Φ), and institutional factors (z) are constant.

What happens to the short-run aggregate supply (SRAS) curve when the profit margin increases (µ) ?

It shifts upwards, meaning prices will rise at any given level of output.

What does the natural level of employment refer to?

The natural level of employment refers to the amount of employment that exists when the economy is at full capacity, encompassing the normal rate of frictional and structural unemployment.

What happens to output when the actual price (P) level equals the expected price level (Pe) ?

The economy operates at its natural or full potential output.

What do changes in the price level cause in the aggregate supply curve?

Result in movements along the curve because wage agreements and pricing strategies are stable given a set expected price level.

What is the formula that shows the relationship between price level and output in aggregate supply?

P = Pe(1 + µ)f(Y/Φ, z),

P is the current price level, Pe is the expected price level, µ is the mark-up, Y is the level of output, Φ is productivity, and z represents institutional factors.

How does the short-run AD-AS model characterize the economy?

It illustrates the balance where planned spending (AE) matches planned production, showing how much is being bought and sold at various price levels.

What happens when the actual price is lower than the equilibrium price level ((P0)?

Leads to higher demand for goods, resulting in a level of national income (GDP) higher than what businesses are ready to produce.

What factors affect how workers negotiate wages in the job market?

The level of jobs available (N) and the current price level (P) shape how workers set their wages, influencing their negotiations.

What is the impact of sudden increases in price level on real wages?

If prices unexpectedly rise, real wages (what workers can actually buy) decrease, meaning workers can afford less than before.

How do institutional factors influence wage levels?

Rules or organized groups, such as trade unions, can push wages higher regardless of market conditions, affecting overall wage-setting.

How does productivity influence the aggregate supply curve?

Higher productivity (Φ) results in lower prices (P) and causes the SRAS curve to shift downwards, meaning the economy can produce more at lower prices.