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)
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)
