PRICES AND COSTS: Introduction 2

But, as Mitchell notes, from the point of view of theory “a problem still remains: Why cannot businessmen defend their profit margins against the threatened encroachment of costs by marking up their selling prices?” As we shall see, a variety of theories of imperfectly competitive behavior by firms explain why they may choose not to do so. Such imperfectly competitive behavior thus plays an important role in accounting for the character of aggregate fluctuations.

Fluctuations in markups are an important factor, in our view, for a reason somewhat different than that emphasized by Mitchell, In Mitchell’s analysis, the squeezing of profit margins late in booms is what brings the boom to an end, as reduced profitability dampens investment demand and hence sales. This suggests that an improvement in firms’ power to set prices above marginal cost would extend the boom. But this neglects the fact that firms cannot a11 raise their relative prices. Let the marginal cost of each firm i be given by Pc(yi), where yi is the quantity supplied and P is the general price level. (Marginal costs are proportional to the general price level because the variable factors of production are supplied at relative prices that depend upon the quantity demanded of those factors.) Your financial troubles could end today: with our instant pay day loans, fair interest rates and transparent terms that contain no catches of any kinds, it’s easy and safe. Apply for a loan at Here and you will be happy you did: we will make sure your financial troubles are gone and over.
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PRICES AND COSTS: Introduction

In this paper, we consider the role of variations in the relationship between the prices at which goods are supplied and the marginal cost of supplying them in accounting for observed fluctuations in economic activity and employment. We shall argue that there exists a great deal of evidence in support of the view that marginal costs rise more than prices in economic expansions, especially late in expansions. Thus real marginal cost (MC/P) rises, for the typical firm; and alternatively, the markup of price over marginal cost (which we shall define as the ratio P/MC1 ) declines for the typical firm.

These two ways of describing the feature of business cycles with which we are concerned are equivalent in the case of a symmetric equilibrium (in which the costs, output and prices of all goods move exactly together), though they are not equivalent propositions regarding an individual firm or industry in the asymmetric case (since the firm’s or industry’s relative price may vary).
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Now consider an interior steady state ms ^ {0, 1} and the associated steady state promotion policy zs = rms. Since
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Proof of Proposition 5:
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