Advanced Macroeconomics: Lecture 6 - AS 2 Price Setting, Unemployment, Phillips Curve

Question 1

What causes unemployment?

Answer 1

Wage (and price) pressures

Question 2

ASSUMPTIONS of the Price Setting (PS) curve

Answer 2

1. Imperfect competition in the goods market. Firms are price makers (monopolies, oligopolies). Set prices as a flat markup over MC, depending on demand elasticity (n).

Perfect competition: Demand elasticity (n) = infinity –> No mark-up over MC. Firms pay workers full MPL.

Imperfect competition: Demand elasticity (n) =/= infinity –> there is a mark-up over MC. Firms only pay workers a fraction of MPL.

Question 3

WS-PS Model equilibrium