Textbook Notes (367,969)
United States (205,923)
Economics (294)
ECON 305 (9)
Dr.Neri (9)
Chapter

Econ 13.docx

3 Pages
68 Views
Unlock Document

Department
Economics
Course
ECON 305
Professor
Dr.Neri
Semester
Fall

Description
Econ 13  Aggregate supply  Y=Y+∝(P−EP),∝>0  Y= output  Y = natural level of output  P=pricelevel  EP = expected price level • Output deviates from its natural level when the price level deviates from the expected price level • 1/ ∝ = slope of AS curve  Sticky price model: emphasizes the slow adjustment of the prices of goods and services.  Firms so not instantly adjust prices to change in demand • Long term contracts, loyal customers, costs to alter prices, sticky wages  Some monopolistic control  The firm’s price depends on… • Overall level of prices (P) ♦ Higher price level means costs are higher • Level of aggregate income Y ♦ Higher level of income raises demand for the product  Means increased production and higher prices • p=P+a(Y−Y) ́ **flexible prices ♦ The desired price (p) depends on the overall level of prices (P) and on the level of aggregate output relative to the natural level ♦ a measures how much the firm’s desired price responds to the level of aggregate output.  Firms with sticky prices set their prices based on p = EP  Overall price level  P=EP+ (1−s) a (Y−Y) [ (s ] • Ahigh expected price level leads to a high actual price level ♦ Because firms that expect high costs set theirs high, so then their competitors do too • When output is high, demand is high, so prices are set high ♦ The effect of output on prices depends on how many have flexible prices  Overall price level depends on the expected price level and level of output  Alternative theory  Imperfect information model: markets clear and prices are free to adjust to balance supply and demand • Individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy. ♦ Unsure if the overall price level has changed (don’t produce more) or the price of just your selling item has changed (produce more)  When actual prices exceed expected prices, suppliers raise their output  Implications  If the price level is higher than the expected price level, output exceeds its natural level  If AD increases
More Less

Related notes for ECON 305

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit