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Lecture 14

ECON 1020 Lecture 14: Lecture 14

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University of Manitoba
ECON 1020
Ryan A.Compton

o82 Help to explain how unexpected changes in demand lead to the fluctuations in GDP and employment that occur over the course of the business cycle Flexible prices: product prices that react within seconds to changes in supply and demand o Commodities and raw materials (corn, oil, natural gas) Price level: the weighted average of the prices of all the final goods and services produced in an economy Total demand: the demand schedule or the demand curve of all buyers of a good or service (also called market demand) Two factors that cause shortrun price stickiness: Companies selling final goods and services know that consumers prefer stable predictable prices that do not fluctuate rapidly with changes in demand In certain situations a firm may be afraid that cutting its price may be counterproductive because its rivals might simply match the price cut (price war) usually among firms that have only one or two major rivals Firms that have to realistically consider the possibility of price wars often have sticky prices Categorizing Macroeconomic Models Using Price Stickiness: Price stickiness moderates over time Firms that choose to use a fixed price policy in the short run do not have to use that policy permanently If unexpected changes in demand begin to look permanent, many firms will allow their prices to change so that price changes (in addition to quantity changes) can help to equalize quantities supplied with quantities demanded Only in the very short run are prices totally inflexible Shortrun: 1) in macroeconomics, a period in which nominal wages and other input prices do not change in response to a change in the price level,
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