9- The determination of wages, prices and supply

Question 1

Aggregate supply

Answer 1

Is the total output of goods and services that firms wish to produce- assuming they can sell all.

Question 2

Difference between SRAS and LRAS

Answer 2

SRAS- all input prices remain constant
LRAS- all input prices have fully adjusted to any demand shock.

Question 3

Short run inputs

Answer 3

Labour assumed to be the only variable input in the short run.

Question 4

Competitiveness of labour markets

Answer 4

Labour are not in reality very competitive due to labour laws, unions, benefits

Question 5

What influences wage setting behaviour

Answer 5

• Employment level (N)
• Inflation

Question 6

How employment level affects wage setting behaviour?

Answer 6

If employment is high, the demand for labour is high and so wages are bid up as firms try to recruit more staff and retain existing staff.

Question 7

How prices affects wage setting behaviour

Answer 7

Inflation likely to influence wage bargaining as workers attempt to maintain the purchasing power of their real wage rate.

Question 8

How wage bargains are struck

Answer 8

When wage bargains are struck, the actual future level of P is not known.
So wage bargains are struck on the basis of expected future price level (P^e).
As P^e rises so the money wage rate is expected to rise.

Question 9

Institutional factors

Answer 9

• Trade unions or unemployment benefit payments (z) may positively influence wages independently of labour market conditions.

Question 10

Expected real wage equation

Answer 10

W/P^e = f(N,z)
W/P- real wage
N- employment level
z- institutional factors