ECON282 Lecture Notes - Lecture 9: Nominal Rigidity, Monopolistic Competition, Potential Output

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27 Jul 2016
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Chapter 9 lecture notes
Short run - when the economy is adjusting – its not in equilibrium
-One or more markets are not in equilibrium
What causes recessions and booms – what can we do to stop them
Long run – why have some countries grown so much while some countries have plateaued in growth
When a country’s economy has run out of its full potential
-No slack in the economy
-Its not in a recession – not underperforming
-Its not over heating – not in a boom, no inflation
-Its sustainable growth
-Economy in equilibrium
-Goods, financial and labour markets all in equilibrium and everything is sustainable
Expansion, boom, recessions – not in equilibrium – not sustainable
Its real GDP
Prices are quite sticky – according to Keynesian economics
-Some prices do change though
-In a recession – it takes time for prices to change
-In the real world – price changes take time
In a recession – prices will drop really quick
-Economy is never in equilibrium for too long
Prices are always changing
Now – belief in sticky prices is more prevalent – Keynesian view is embraced
Some shock has to happen to knock off the equilibrium
Shock – has to be huge and unexpected
- any type of natural disaster
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-War – civil unrest
-Financial crisis
-Innovation could be one – internet – realizing how valuable it could be
-The steam engine
-Assembly lines
-Specialization of labour
If people know they are coming – then its not a shock – for instance – ageing population – we have
known about this for a long time – so it wont be a shock
Prices are going to go up and down and people need to know how to act
-Oil prices went down – Alberta in recession
-Businesses – layoffs and decrease spending
-People are moving out of Alberta
-People and money moving about in response to the price change
-Money, people, resources moving out from the oil and gas sector --- eventually moves
toward equilibrium
Sticky – because everything pretty slow to adjust
Short run – sticky
In the long run – prices and wages have all adjusted – flexible
Nominal price is being looked at for sticky prices
-Perfectly competitive, oligopolies, monopolistically competitive, monopolies – not everything is
competitive – they have more power over prices to keep the prices set
-Menu costs - less relevant – online shopping
-Customers are going to be angry with changing prices
-Real world – businesses on average only change their prices once or twice an year
-You need to hire people to check what the price should be
Prices only change when the benefits are higher than the cost
Wages = the most important and most sticky price
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