Input prices

February 22, 2016

Input Prices

Domestic resource prices

-wages (75% of all business costs)

-capitol cost

-raw materials (commodity prices)

Foreign resources prices

-strong $ = low foreign resource price

-weak $ = higher foreign resource prices

Market power

-increase in resource prices = SRAS ß

-decrease in resource prices = SRAS à

Productivity

Total output/total inputs = productivity

·           More productivity = lower unit production cost = SRAS 

·           Lower productivity = higher unit production cost = SRAS 

Legal- institutional environment

·           taxes and subsidies

-taxes ($ to government) on business increase per unit production cost = SRAS 

-subsidies ( $ from government) to business reduce per unit production cost = SRAS 

Government regulation

-government regulation creates cost compliance = SRAS 

-deregulation reduces compliance cost = SRAS 

Full employment

·             Full employment occurs where AD intersects SRAS and LRAS at the same point

Recessionary gap

·             Recessionary gap exists when equilibrium occurs below full employment output

Inflationary gap

·             An inflationary gap exists when equilibrium occurs beyond full employment output 

Changes in AD

·           Change in consumption (c)

-c ^: AD : GDPr ^ & PL ^: U% v 

-c v: AD 

·             Change in gross private investment (Ig)

-Ig ^: AD 

-Ig v: AD 

·             Government spending (G)

- G ^ : AD 

- G v : AD 

·             Net exports (Xn)

-Xn ^ AD 

-Xn v AD 

Changes in SRAS

·             Input prices

- input prices v : SRAS 

- input prices ^ : SRAS 

·             Productivity

-productivity ^ : SRAS 

-productivity v : SRAS 

·             Legal-institutional environment

- deregulation : SRAS 

- regulation : SRAS 

 Nominal wages- the amount of money received by a worker per unit of time (how much you make)

Real wages- amount of goods and services that a worker car purchase with their nominal wages (purchasing power of nominal wages)

Sticky wages-  nominal wage level that is set according to an initial level and does not vary due to labor contracts or other restrictions.

Output- depends upon changes in the employment level. Output depends upon changes in price and employment level output is independent in changes in price level.

Keynasian Range Classical range		price	Wages	Employment level	implications
	recession	fixed	fixed	flexible
	Intermediate	flexible	fixed	flexible
	inflation	flexible	flexible	fixed