BCR use GMM to estimate parameters for each sector in the model. Price rigidities are only significantly different from zero for nondurable goods and services, however the p-value of a Wald test rejects a null hypothesis of homogenous price rigidities across sectors. This result suggests that price rigidity in the service sector alone drives previous estimates of price rigidities based on macroeconomic data. This result is supported by Bils and Klenow (2004) and Baudry et al. (2004) using final good prices in the CPI basket to report heterogeneous price stickiness and longer duration between adjustments for services. Expected durations between price adjustments following Calvo (1983) pricing are nine quarters for services, and as low as …show more content…
- this could explain the variation of price rigidities between macro and micro based studies. BCR analyse impulse response functions to a temporary 1% rise in the growth rate of money supply, after which the level returns to its steady state. This monetary shock has many aggregate dynamics generating a rise in aggregate demand, increasing aggregate output. However the sectoral heterogeneity modelled by BCR produced variations in effects across sectors. Output increases in services and construction are larger than those for durable and nondurable goods. The mechanisms for these results are found to be different by BCR, with monopolistically completive services and durable goods sectors increasing output to meet rising demand. Conversely, increases in construction and nondurable goods output occurs in spite of flexible sector prices, reflecting the demand of other sectors for investment goods following the initial increase in aggregate demand. As investment goods production takes place majoritively in these sectors, the increase in output of both sectors is large. Services is the most labour intensive sector analysed, explaining why it displays the largest increase in real wages, as firms demand more labour from households. The reallocative effect of monetary policy shocks on labour mobility has been noted by Davis and Haltiwanger (2001), with BCR’s results mirroring to some level labour mobility across sectors as seen in US data. A large change in relative prices is also
Unlike the price elasticity of demand, the price elasticity of supply plays an important role on how producers respond to the change in price. I argue that all bread sold in Canada has more elasticity than all shoes sold in Canada owning to three main factors, which are the availability of raw materials, length and complexity of production and mobility of factors.
For example, If you are selling a product that is a normal good with a high rate of competition in the market, raising the price could have negative effects on overall profits because users will simply find another substitute somewhere. Charles stated that market separation may come into play when firms realize there are differing elasticity curves for different consumers of the same product. Firms can maximize profits by evaluating consumer segments within a single market. If the firm notices different demand elasticity for different segments it may opt to engage in price discrimination to maximize profits. Charles gave Microsoft Office as an example; the same software is offered to students, casual users and business users at different price
Microeconomics and macroeconomics concepts aide in the understanding on how they affect the shifts of supply and demand affect equilibrium price and quantity. Microeconomics focuses on supply and demand (Colander, 2010). A company would look at ways to increase production that could decrease their prices compared to competitors. This would adjust the equilibrium price of products by increasing the quantity that is available. This would allow the company the ability to pass price savings to consumers. Macroeconomics is used as the economy changes such as with inflation (Colander, 2010). Inflation would cause a company to have increase cost of materials in producing their product. This creates a change in quantity to be provided as supply has to be adjusted to meet the decrease of demand due to the economy affects on equilibrium price.
How has growth changed since the Great Recession? How has monetary policy around the world changed since then? Should central bankers seek to return monetary practices back to the old normal or adapt to new
This is because other dealers in the market will get an opportunity to sell their products in the market. Customers can get products locally with the change. Some suppliers can still get a way of working around the pricing issue to increase their sales.
How do the concepts of microeconomics help you understand the factors that affect shifts in supply and demand on the equilibrium price and quantity?
Elasticity : rising or falling price lead changes in quantity of demand, and the quantity of supply and this so-called elasticity
If Tesco decides to change the price of their goods, for example; the price of their doughnut in 2009 was 5 pieces for a pound, a reasonable price for students but with the economic environment it affected everything with
Theories about how the economy works and what will happen in the economy where there is monetary policy or fiscal policy intervention are appropriate in assisting policy-makers understand the possible implications of decisions they make or are under consideration. However, they are rarely complete models and often outcomes cannot be predicted. Reintroduction of a theory suggests that new evidence in support of the theory has been reported.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects
The change in prices also had an impact on the Italian region’s expected and actual profit because the €7 total sales variance represented an increase of €7 profit for the actual profit. The €7 variance was calculated by the favorable €20 variance for ice cream sales and an unfavorable variance of €13 for specialty sales (€20-€13=€7). This proves that the Italian region can charge slightly more for their ice cream sales given the increase in demand, while the increase in demand of the specialty product could be more attributed to the decrease in price. Overall, the change in pricing came out to make a positive impact on the Italian region’s profit.
In my opinion, how effective low interests rates are to encourage consumers to borrow and spend depends on the elasticity of the demand for loans. If the demand for loans is inelastic, a sharp reduction in interest rates will only increase the loans by a small amount. Please refer to Appendix G. In this case, lowering the interest rates to 0.5% is not enough to stimulate demand. As a result, quantitative easing, another monetary policy is being utilized, as bank rates could not go any lower. Although there are other underlying factors that contribute to the high unemployment rate in the UK, it is shown that reducing bank rates is not the key to solving this problem.
pricing closely, as being out of step with the market can cause dramatic market share changes in a
Second, they must manage within a world of price controls that dictate a wide range