What is wage and price flexibility?
Wages are said to be flexible when they respond to changes in supply and demand and lead to the market clearing wage being set. It implies that the wage will be set by the Marginal Revenue Product of labour and marginal cost of labour. Any change in supply and demand for labour will lead to a change in the wage rate.
Are wages and prices flexible in classical economics?
New classical economists build their macroeconomic theories on the assumption that wages and prices are flexible. They believe that prices “clear” markets—balance supply and demand—by adjusting quickly.
What is meant by wage flexibility?
The extent to which wages and salaries can rise or fall due to rising or falling profits. That is, a company or economy has wage flexibility if, when times are good, it provides employees raises but has the ability to impose cuts when times are difficult.
What is price flexibility?
Flexible pricing is the practice of pricing a product or service by negotiations between buyers and sellers, within a certain range. Flexible pricing enables price segmentation – by offering different segments different rates – companies are able to offer similar product at rates appropriate to each buyer.
What is meant by wage price flexibility in a free economic system of the classical full employment model How does flexibility of wages and prices ensure full employment?
Wage Price Flexibility: In case of unemployment, a general cut in money wages would take the economy to the full employment level. This argument is based on the assumption that there is a direct and proportional relation between money wages and real wages. Thus the key to full employment is a reduction in money wage.
What is wage rigidity?
Rigidity in wages has long been thought to impede the functioning of labor markets. Rigidity in real wages, such that nominal wages quickly or immediately adjust to changes in prices regardless of economic conditions, could arise from explicit or implicit contracting or as a byproduct of efficiency-wage setting.
What is classical wage theory?
Classical wage theory attempted to explain wages in a given period, to identify those factors which would influence the trend of wages over time and to account for the eventual level of subsistence wages in the approaching “stationary state” in which economic growth would cease.
What is the classical position on prices and wages?
Classical economists consider that an economy is always in equilibrium at full employment level. Wage, price and interest rate are the factors will adjust the economy to achieve the equilibrium level, if a market has a flexible demand and supply.
How does flexibility of wages and prices ensure full employment?
The classical theory assumes over the long period the existence of full employment without inflation. Given wage-price flexibility, there are automatic competitive forces in the economic system that tend to maintain full employment, and make the economy produce output at that level in the long run.
Why is price flexible?
Flexible pricing makes the potential of a more efficient marketplace suddenly realizable. When prices can vary constantly with changes in supply and demand at little cost, buyers can more easily find the price at which they are willing and able to buy.
Why is price the most flexible?
Answer: Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. … A small percentage improvement in price can generate a large percentage increase in profitability.
How does wage price flexibility ensure full employment in the classical model explain briefly?
When there is a cut in the money wage, the real wage is also reduced to the same extent which reduces unemployment and ultimately brings full employment in the economy. This relationship is based on the assumption that prices are proportional to the quantity of money.
Why do classical economists believe in wage price flexibility?
Wage Price Flexibility: The classical economists believed that there was always full employment in the economy. In case of unemployment, a general cut in money wages would take the economy to the full employment level. This argument is based on the assumption that there is a direct and proportional relation between money wages and real wages.
What is the classical theory of wage and employment?
If, however, unemployment still persists, it must be due to the refusal of the workers to accept the lower real wage rate which corresponds to the reduced marginal product of their labour. The second postulate of the Classical theory is that “the existing real wage is equal to the marginal disutility of employment”.
Why are markets reequilibrate According to classical theory?
The classical theory proposes that all markets reequilibrate because of adjustments in prices and wages which are flexible. For instance, if an excess in the labor force or products exist, the wage or price of these will adjust to absorb the excess. If prices and wages are flexible, markets reequilibrate.
Which is the classical equation for price level?
The classical model is presented in the following four equations: 1 Y = f (L), i.e., output or income is a function of the level of employment L (with dY/dL > 0, but declining as L increases). 2 dY/dL = W/P, i.e., MP L = real wage. 3 L = f (W/P), i.e., employment is a function of real wage [with dL/d (W/P) > 0].