The determinations of wages, prices and supply Flashcards
What is labour in terms of the short run production progress and how should the labour market be treated
Labour is the only variable input in the production process short run
Should not be treated as a competitive market
What factors are likely to influence the level of real wage rates (W) and how
The level of employment (N) - higher demand for labour will increase wages
Price Level (P) - will influence wage bargaining as workers attempt to maintain purchasing power
How does P and Pe contribute to the real wage equation
when wage bargaining occurs the actual future P is unknown so negotiations are made based off future expected P denoted as Pe
What else contributes to wages other than N and P
Institutional factors (z) - trade unions and unemployment benefits positively influence wages independent of labour market conditions
What is the expected real wage function
W/Pe times by F(N,z)
What is the actual real wage rate
W=Pe/P times by F(N,z)
Whats the correlation between real wage and unemployment rate
Positive linear correlation
What is the price setting equation
P=(1+mew)W
P is prices
Mew is the mark up
W is the wage costs
This can be rearranged and plotted against the real wage function
Describe the graph comparing real wage rate and employment (combining price setting and wage setting behaviors) and explain what the intersection means
Wage setting graph is positive linear
Price setting is parallel to the x axis and moves up and down based off of markup
The intersection is N0 which is the natural level of employment
What is the standard neo-classical production function and what does it link together
Outputs = capital inputs (K) + labour inputs (N)
K is fixed in the short urn and we assume a linear production function Y = Phi x N
Phi is the constant marginal product of labour
How do you get from the production function to the relation for SRAS and what is SRAS
Invert the production function and substitute N into the wage-setting relation
Check the word document for SRAS formula
What happens to the AS curve when P changes
Changes in P will shift the wage setting line and will cause movements along the AS curve
If Price goes up then wages will fall meaning that which will move left along the SRAS curve
What happens to AS if there is a rise in markup
It will lead to an upwards shift in the SRAS curve
What will a rise in productivity (Phi) lead to
A fall in P and a downward shift of the SRAS curve
Why would there be a rise in z and what will it do to the SRAS curve
A rise in z will likely be due to an increase in unemployment benefits and will lead to an upwards shift in the SRAS curve
What does P0 and Y0 represent on the AD-AS graph
It is the point where desired AE and desired supply are consistent
What does it mean if P is greater or smaller than P0 on the AD-AS model
If P<P0 then desired and actual spending is consistent with a level of GDP that is greater than the desired output of the firms - AD is greater than AS
If P>P0 then desired spending is consistent with a level of GDP that is less than the desired output of firms - AD is less than AS
