lecture 5

Question 1

short run

Answer 1

period in which wages and some other prices do not change in response to economic conditions. fixed price

Question 2

medium run

Answer 2

in certain markets, including wages, price may not adjust quickly enough to maintain equilibrium. variable price.

Question 3

long run

Answer 3

wages and prices are flexible. economy returns to its natural level of employment. variable price.

Question 4

classical economy

Answer 4

no government intervention, price level adjusts to demand and output level of economy. output is fixed

Question 5

keynesian economy

Answer 5

prices and wages are sticky. firms are willing to supply any amount of output at that price level. supply/output adjusts to demand

Question 6

why is AS upwards sloping in medium run?

Answer 6

changes in demand leads to changes in production, therefore changes in employment, therefore changes in wages, therefore changes in prices

Question 7

assumptions to study the labour market

Answer 7

labour is the only factor of production. firms are price setters. CRS technology. Wage is bargained between firms and workers/unilaterally set by firms. labour force is fixed.

Question 8

bargaining wage determination

Answer 8

wages are bargained by unions and forms. can be at firm, industry, or national level. unilaterally fixed by firms. bilateral bargaining between firms and workers.

Question 9

union types

Answer 9

centralised (industry wide) or decentralised (firm specific)

Question 10

bargaining power

Answer 10

depends on how costly it would be for the firms to replace the worker after dismissal, and how hard it would be for the worker to find another job. implications: depends on skills required and nature of job (skilled/unskilled workers), and labour market conditions.

Question 11

efficiency wage

Answer 11

firms pay more than the reservation wage to make workers happy and productive. High wage reduces turnover and increases morale.

Question 12

reservation wage

Answer 12

the wage at which a worker is indifferent between working and being unemployed

Question 13

aggregate nominal wage

Answer 13

W = (Pe)(F)(u, z) where pe = expected price level, u = unemployment rate, z = other variables for example unemployment benefit, minimum wage

Question 14

price determination

Answer 14

depends on technology of production (the function linking inputs and produced output) and input prices (W).

Question 14

wage setting relation

Answer 14

w/pe = F(u,z). shows a negative correlation between expected real wage and unemployment rate. z effects position of the WS curve

Question 15

technology

Answer 15

Y = AN assuming A=1, unit cost of production is W

Question 16

price determination under monopoly

Answer 16

firms put a markup over MC (u). P = W + uW. if markets are perfectly competitive, u = 0 and P=W

Question 17

price setting relation

Answer 17

W/P = 1/1+u. shows that the price setting decision determines the real wage paid by firms.

Question 18

natural rate of unemployment

Answer 18

unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting. an increase in employment benefits and increase in markups (as real wage decreases) leads to an increase in NARU.