MacroTheAnalysisofPriceDetermination(宏觀經(jīng)濟學(xué)南開大學(xué),龔剛)

1、MacroeconomicsMacroeconomicsLecture 9 The Analysis of Price DeterminationI. IntroductionnThe objective is nto discuss how price and wage are determined in Keynesian analysis.nThe medium run versus short run nIn the short run, price is assumed to be fixed.nIn the medium run, price is assumed to be ad

2、justable.II. Principles in Price Determination nMarket Condition (excess demand or excess supply)nThis is more emphasized in microeconomics and in Neo and New classical analysis.nGenerally speaking, Keynesian economics does not exclude the market condition (excess demand or supply) as a factor to de

3、termine price. nIn macroeconomics, the inflation caused by market condition is often named as demand-pull inflation. II. Principles in Price DeterminationnCost conditionnIn addition to demand-supply condition, the cost of production is also an important factor in price determination.nThis seems to b

4、e more emphasized in Keynesian economics.nIn macroeconomics, the inflation caused by cost is often named as cost-push inflation.II. Principles in Price DeterminationnThe Rule of Expectation nThere is no doubt that expectation is also an important factor in determining price. This is particularly emp

5、hasized by Milton Friedman.nHow does expectation influence the price?nHow is expectation formed? II. Principles in Price DeterminationnStaggered Price Adjustment nAlthough price may response to market condition, it does not means that the price will clear the market in each period. This is because p

6、rice adjustment is somewhat staggered. nThere are some micro-model for this staggered price adjustment in New Keynesian literature, which we shall discuss later in this lecture. III. Wage DeterminationnIn reality, wage may be set by many ways:nCollective bargaining between firms and unions; nThe gov

7、ernment may set up a minimum wage rate; nFirms may simply decide a wage rate according to the market condition; nOr a firm may even pay an efficiency wage (the wage level beyond the market condition) to keep the worker work efficiently. III. Wage DeterminationnWage EquationnIn a very simple way, one

8、 could write the following equation regarding the wage determination: where W is the wage, Pe is the expected price, N is the unemployment rate and z represent other factors. (, )eWW PN zIII. Wage DeterminationnWage Equation (continued)nRemarks: the above way of wage determination captures our three

9、 basic forces (market, cost and expectation) in determination of price.IV. Price DeterminationnMarket and Cost ConditionnIn macroeconomics, the most important components in the cost of a product is perhaps the wage. nTo reflect the market condition, one may use the capacity utilization U:nwhere Yp i

10、s the potential output, K is the capital stock and is the output-capital ratio (capital productivity). /pUY YpYKIV. Price DeterminationnPrice equation P = P(W,U,v) where v is referred to other factors in determining prices.IV. Price DeterminationnOther factors in Price Determinationnthe market conce

11、ntration in general industry;nimport price (exchange rate foreign prices);ntechnology;nexpectation;namong many others.V. New Keynesian Staggered Pricing ModelnThe so-called staggered price means that prices respond to market condition not with infinitely fast speed so that the price can always be ad

12、justed to the “optimum”, but “step by step”.nRemark: being careful about the meaning of optimum IV. New Keynesian Staggered Price ModelnThe Assumption about the Firm nThe firm is assumed to be a monopolistic competitor. This is different from the perfect competition assumption, which is often assume

13、d in neoclassical or New Classical economics. nIn each period t, the firm has to make a decision about price (increasing, decreasing or remaining the same) and also the quantity given the demand curve the firm expects. IV. New Keynesian Staggered Price ModelnThe Decision of a FirmnSuppose in period

14、0, the firm has settled a price P0 optimally according to its expected demand curve D0 (see the figure in the next page). IV. New Keynesian Staggered Price ModelnThe Decision of the Firm (continued)IV. New Keynesian Staggered Price ModelnThe Decision of a Firm (continued)nSuppose now the market dema

15、nd at P0 is equal to Qa. Given this new information, it is quite possible that the firm will change its expectation on the demand curve to Da. nGiven this new expected demand curve, should the firm will change the price from original optimum P0 to the new optimum P1 ?IV. New Keynesian Staggered Pric

16、e ModelnAdjustment CostnChanging price is not costless. nFor example, it may request to reprint the menu, often called menu cost.nAnother example is that it may impact the firms reputation. nAll these costs are beyond the usual cost of production. nThe more frequency and the larger extent in changing price, the larger is the adjustment cost.IV. New Keynesian Staggered Price ModelnStaggered Price TheoremnApparently, if the adjustment is too high, the firm may find that it is not an optimum decision to change the