Lecture 11-The Phillips curve.pdf

# Lecture 11-The Phillips curve.pdf - 30-Jan-18...

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30-Jan-18 1 MACROECONOMICS LECTURE 11 THE PHILLIPS CURVE CONTENTS OF THE LECTURE 1. Price setting 2. Wage setting 3. Deriving the Phillips curve 4. The Phillips curve in the US CONTENTS OF THE LECTURE 1. Price setting 2. Wage setting 3. Deriving the Phillips curve 4. The Phillips curve in the US

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30-Jan-18 2 1. PRICE SETTING Suppose a firm that produces only 1 laptop and has only 1 employee ( L ) . The wage of this employee ( w ) is \$5 . What is the unit labour cost (ULC)? The unit labour cost is the compensation of all employees per laptop produced. In other words, it is equal to Recall from Lecture 12 that labour productivity ( λ ) is given by In our case, labour productivity is equal to 1. Unit labour cost (ULC) can be rewritten as 4 5 \$ 1 1 5 \$ Y L w L Y 5 \$ 1 5 \$ / w L Y w Y L w 1. PRICE SETTING If the firm does not have any other costs except for wages, what do you expect to be the price of laptop, given that the unit labour cost is \$5? The price of laptop should be higher than \$5 . Otherwise, the firm would not cover its costs. The higher the market power of firm the higher the price of laptop relative to the wage cost. We can use the following formula to express this fact: m>0 is the mark-up (expresses the market power).
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