ECO2004S Summary that will change everything! (1).pdf

Prices are set according to the cost of production

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Prices are set according to the cost of production (depends on nature of production) Assume that firms use only labour to produce Y = AN Y = output N = employment A = output per worker
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If we assume that 1 worker pr In perfect competition: If Then And In a competitive marke Wage setting Relation Assume P e (expected p Wage setting and price divide both sided by P Wage setting relation: unemployment and the roduced one unit of output (A =1 ) then: Y = N : P = MC Y =N MC = W P = W et firm want to set a price above MC so: P = (1+ m)W prices) = P (Price level) e setting determine equilibrium W = PF(u,z) (-,+) W P =F(u,z) Real wage W/P will be the relation betwee e catchall variable en Wage setting relation
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Price Setting Relation Price determination is: Divide both sides by W Equilibrium in the Labour M Real wages: wage settin U = natural rate of unem : P = (1+ m)W P W =(1+m) W P = ¾ (¾¿À) Market ng = Real wages: price setting mployment F (u,z) = 1 (1+Á) Price setting relation
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Deriving Formulae CHAPTER 7: AS-AD MO Aggregate Supply AS Describes the effect of Behavior of wages and Wage set Price set The price level (P) is de unemployment rate ‘u’ Put unemployment (u) This shows that the hig rate Substitute into the AS m P=(1+m)PF ODEL the price level on output d price tting relation: W=PF(u,z) + tting relation: P=(1+m)W = P=(1+m)PF(u,z) etermined by the expected price level P e an ’ (assume m and z are constant) ) in terms of output U= u L = L-n L =1- n L =1- y L gher the level of output, the lower the unem model F( 1- y L ,z) nd the mployment
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AS model describes tw 1. Increase 2. Increase Aggregate Demand AD Describes the effect of Derived from the good IS L wo important properties: e in output (y) increase in price level (P) e in expected price level increase in pric the price level on output (like AS) ds market and financial market LM-IS S Y = C(Y-T)+ I(Y ; i) + G LM YL(i) = M/P ) ce level G
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Equilibrium in the AS-AD mo In the short run : wher - Y can be - Any varia change e In the Long Run : ou ch odel re the goods market = financial market = la above or below the natural rate of unempl ables within the LM, IS and Labour market equilibrium utput returns to the natural level of output hanges in the price level abour market loyment t model can t through
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CHAPTER 8: THE NRU A The Phillips curve backgrou Negative relationship b unemployment Broke down in the 197 Inflation and expected infla Remember the aggrega P = P e ( and F(u,z)= then P = P e ( Where: M = mark up P e = price level expecte F = outflow from unem and unemployment (u) From this we can write π t = π t e t = time index (specific An increase in expected An increase in the mark and thereby inflation An increase in the unem When looking at a spec Unemployment (u) has The Phillips Curve Under the Phillips curv Therefore we assume π π t e = (m Hence the negative rela AND PHILLIPS CURVE und between inflation and 70’s ation ate supply relation: (1+m)F(u,z) = 1 – αu+z (1+m) (1 – αu+z) ed
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