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Lecture #12 - Inflation Part 2

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Price determination amongst conflicting class interests

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  • December 10, 2024
  • 5
  • 2024/2025
  • Class notes
  • Yeo hyub yoon
  • Lecture #12 - inflation part 2
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Inflation


Who determines the prices?

Who is in the position to change the prices?

Firms charge a prices higher than the wage cost:

P = (1+m) W

Price of output = (1 + markup rate)* wage

Example: a simple pricing rule for a barbershop

Hairdresser’s wage rate per customer = $30
Mark-up rate = 50%
Find the haircut price!

The hairdresser’s wage rate per customer = $30

The markup rate was 50%, but the owner of the shop decided to raise the markup rate
to 70%

What will be the new price of a haircut?


The hairdresser’s wage rate per customer was $30.

The mark-up rate is 50%, but the owner of the shop decides to raise wages for
hairdressers, so the new wage rate per haircut is not $50.

What will be the new price of a haircut?

, Major Causes of Inflation

What are the causes of inflation?

Consider the pricing equation:
P = (1+m)* w

1.​ What would be the determinants of the markup rate?

2.​ What would be the determinants of the wage rate?



4 Major Causes of Inflation

1.​ Increases in the bargaining power of firms over their consumers (monopoly)

2.​ Supply cost shock (such as oil price and energy prices)

3.​ Rising demand for outputs over productive capacity

4.​ Increase in the bargaining power of workers over firms (when unemployment is
low)

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