ECON 102 Chapter Notes - Chapter 3: Nominal Rigidity, Market Clearing, Deflation

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Prices: versatile versus sticky, economists generally expect the price of a good or a service to change rapidly to bring the quantity supplied into line with the quantity demanded. In other words, they assume that a market goes to the balance between supply and demand. This process is called market clearing, and is central to the previously mentioned pizza business model. Economists use techniques of market clearing to address the most questions: yet presuming continuous clearing of the market is not entirely fair. Rates must respond rapidly to shifts in supply and demand in order to keep markets open. And, in fact, many wages and prices are gradually increasing. Labor contracts often set wages as high as three years. For long periods of time, many businesses keep their product prices the same for example, magazine publishers typically change their newsstand prices about every three to four years.

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