Inflation and Price Essay

Submitted By evangeliag10
Words: 3052
Pages: 13
Open Document
Evaluation Points:

PED & Revenue
Price cuts are revenue increasing for elastic goods
I Warning 1. To meet the increased demand you must increase production. If marginal cost is increasing then you may end up decreasing profits
I Warning 2. We assume that there is no reaction to your price cut from rival firms

Price Increase Price Decrease
Elastic Demand TR falls TR increases
Inelastic Demand TR increases TR falls
Unitary Demand TR Unchanged TR Unchanged
Income elasticity can be positive or negative
I Positive for normal goods
I Negative for inferior goods
I Luxury goods are income elastic
I Necessities are income inelastic

I Cross price elasticity can be positive or negative
I Positive for substitutes goods
I Negative for complements goods
I Close substitutes will be cross price elastic
I Far substitutes will be cross price inelastic

Mid point method
PED =
(Q2 - Q1)/(Q1 + Q2)/2
(P2 - P1)/(P1 + P2)/2
Marginal cost is key to output decisions
I AC = TC/Q
I MC = 4 TC/4 Q
I Average revenue is P_Q
Q
I Marginal revenue is 4 TR/4 Q

Barriers to entry maintain the monopoly
I Natural monopoly
I Economies of scale
I Product differentiation
I Control of supply chain
I Legal restrictions
I Mergers

Mark Up
The price mark up above MC depends on demand elasticity
P =MC/1+ (1/ed )

P – MC/P = -1/ed
I The more inelastic, the higher mark up
I Monopolist can raise price without losing too many customers I Recall if a competitive firm tries this it loses the whole market! Injections ‘J’ add to national income
I Investment ‘I’
I Government Spending ‘G’
I Exports ‘X’
I J = I + G + X

Withdrawals ‘W’ decrease national income
I Saving ‘S’
I Taxation ‘T’
I Imports ‘M’
I W = S + T + M

Aggregate Demand is sum of all the demand in the economy
I AD is the total amount spend on goods in the economy
I AD = C + J
I AD = C + G + I + [X M]

I Multiplier = 1/MPS = 1/1-MPC

Interest Rates: increase in P, increase Demand, Increase interest rate, increase S, decrease AD

Real Balance: increase P, increase S, Decrease AD

Trade Balance: increase P, decrease X, increase M, decrease AD

A Bank’s balance sheet is driven by trade-off profitability and
Liquidity

I Total Assets (loans) = Total Liabilities (deposits)
I LR = liquid assets/total assets
I Legal requirement to satisfy the liquidity ratio

What causes the money supply to shift?
I Banks reduce liquidity ratio
I Non-bank private sector chooses to hold less cash
I Public-sector deficit
I Inflow of funds from abroad

Equilibrium is achieved through changes in the interest rate
If Ms > Md = increase bonds
Increase in Pbonds decrease in r%
Fall in r% until Ms = Md

An increase in Ms increase in AD
I The Exchange Rate e transmission mechanism
Increase Ms decrease r% decrease e increase X& decrease M RISE IN AD
Increase Ms increase Demand for fixed assets decrease e increase X& decrease M RISE IN AD

Cost push inflation
Rising costs independent of demand
I Contraction of output (and employment) in response to higher costs
I Import price shocks
I Especially oil, cereal and metal shocks
I Uncompetitive labour, unions
I Inflationary Expectations

Aim to boost AS over the long run
I Investment in infrastructure & education
I Incentives for innovation e.g. patents, tax breaks on R&D
I Labour supply growth

Demand pull inflation
The AD-AS framework makes for clearer marginal analysis
I Inflation caused by increases in AD so long as AS is upward sloping
I This may be through monetary expansion (see L13)
I But may also be caused increases in C, I, G or X
I Clear output-inflation trade-off

In the Cournot model of oligopoly…?
B) Firms simultaneously choose output levels according to the output they think their competitor will produce.

The demand for money refers to...?
A) The proportion of your
Show More

Related Documents: Inflation and Price Essay

Essay about Inflation and Price Level

assumed to be 6%. 3/18Topic IV * We will develop a macroeconomics model to help understand and make predictions about short and long-run movements in output (real GDP), the price level and unemployment * Review macroeconomics goals- -Economic growth-measured using real GDP -Stable prices- measured using the consumer price index -Low unemployment- measured using the unemployment rate -Observation-Long run- the economy tends to grow at an average annual rate of about 3% per year. Potential…

Words 1205 - Pages 5

Rainforest: Money and House Price Inflation Essay

it is possible sometimes that the government under- or over-reacts to inflation data. What’s Wrong With Inflation? It’s a matter of degree; 25% inflation is much worse than 5% inflation. Some countries (eg Russia and Serbia) have recently had hyper-inflation with prices rising by up to 1000% pa! Low inflation, such as the 2% or so the UK has at present, is not a real problem. The UK has had a big problem with inflation in the past. It rose to 28% in the late 1970s. This caused significant…

Words 711 - Pages 3

Macroeconomics: Inflation and Overall Price Level Essay

Macroeconomics is the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment. It concerns the effects of national economic policies, an example of which is taxation rates and application, on the national economy. Macroeconomics is based on assumptions in microeconomics. Gross domestic product is an economic statistic describing the monetary value of all the finished goods and services produced within a country’s borders. Included are all of private and public…

Words 555 - Pages 3

Essay on Inflation Rises

What is Inflation? Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money buy. When inflation goes up, there is a decline in the purchasing…

Words 1071 - Pages 5

Future Inflation Essay

Theory In the economy inflation relates to the rise in the level of prices of goods and services during a period of time. When the prices of good rises in a market economy each unit of currency would buy fewer good and services than before. The power of inflation creates a decrease in the purchasing power of money. The inflation can be measure by the inflation rate the change in the price index during a period of time. Inflation can perceived as a negative or positive effect for the economy…

Words 791 - Pages 4

Eco Research Paper

MICROECONOMICS & MACROECONOMICS RESEARCH PAPER: FOOD INFLATION IN INDIA NAME: DHARA PATEL PROF: DR. ESIN CAKAN (ECON- 6601 SPRING – 2015) Abstract Inflation denotes paying more for goods comparatively due to increase in prices due to the disproportionate changes in amount of supply and demand. Indian inflation rate is measured in the Whole Price Index (WPI). The inflation can be controlled through certain measures like fiscal measures, monetary measures, physical or non-monetary measures and…

Words 1948 - Pages 8

Inflation and Unemployment Rate Ans Essay

of the money supply c. the inflation rate b. the interest rate d. none of the above ANS: D 2. In the long run, the actual inflation rate depends primarily on: a. the expected inflation rate b. the Phillips curve trade-off c. the rate of growth of the quantity of money d. the unemployment rate ANS: C 3. The Phillips curve implies that the economy faces a: a. long-run trade-off between price inflation and the level of real wages b. short-run trade-off between inflation and unemployment c. short-run…

Words 791 - Pages 4

Commerce Exam Essay

Commerce Exam – Essay Q/Define the term “Inflation” and discuss its economic effects and also outline the role of the Reserve Bank of Australia (RBA) and the Federal Govt in trying to control inflation. Inflation One of the most important economic concepts is inflation. At its most basic level, inflation is simply a rise in prices. Over time, it increases the costs of goods and services and due to that the value of a dollar goes down because you are not able to purchase as much with that dollar…

Words 843 - Pages 4

Essay about ECON 102 Pdf

Thursday March 19! ! Chapter 30 Inflation and Disinflation ! You will learn! - wages respond to output gaps and inflation expectations ! - how constant rate of inflation is incorporated into basic microeconomic model ! - how AD and AS shocks affect ! - what happens when BOC validates demand/supply shocks (validation process)! - three phases of inflation! - how cost of disinflation is measured by sacrifice ratio ! ! Effects of Inflation ! - failure to anticipate inflation impost costs to labour market…

Words 2090 - Pages 9

Lecture9 Inflation Essay

Macroeconomics Lecture 09 February 5, 2013 Inflation The CPI is Used to Measure the Rate of Inflation Becomes a problem when it is high & “out of control” The annual inflation rate is the percentage change in the consumer price index (CPI) from one year to the next. CPI2010 = 218.056 CPI2011 = 224.939 The inflation rate for 2011 = ((224.939 – 218.056) / 218.056) x 100% = 3.16% Your dollar lost 3.16% The higher the rate of inflation, the more quickly the U.S. $ loses its value in…

Words 872 - Pages 4