Figure 4.25: Price Responses to Rising Employment and Capacity Utilization
This figure illustrates how rising capacity utilization can lead to profit-push inflation. As capacity utilization increases, firms become capacity constrained, meaning they have more orders than they can fill. Since their competitors are in a similar situation, competitive pressures are reduced. This allows firms to increase their price markups over costs, which widens the bargaining gap and initiates a wage-price spiral.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Related
Figure 4.25: Price Responses to Rising Employment and Capacity Utilization
An economy experiences a period where the costs of labor and raw materials remain stable. However, after a wave of mergers reduces the number of companies in several key industries, the remaining firms begin to increase their prices significantly more than their production costs. Which of the following best identifies and explains the resulting inflationary pressure?
Analyzing Inflation Drivers in an Economy
Explaining an Alternative Inflationary Mechanism
Arrange the following events in the correct chronological order to illustrate the process by which a reduction in market competition can lead to a sustained increase in the general price level.
In a scenario of profit-push inflation, where firms increase their price markups due to a decrease in market competition, the price-setting (PS) curve shifts upward, creating a positive bargaining gap that drives inflation.
Match each component of the profit-push inflation model with its corresponding role or outcome in the economic process.
Evaluating Claims About Inflation Drivers
When firms with increased market power decide to raise their profit margins, the price-setting curve shifts ______, which creates a bargaining gap and initiates an inflationary spiral at the existing level of employment.
Disaggregating Inflationary Pressures
Consider an economy where several key industries become more concentrated, leading to reduced competition. Firms in these industries subsequently raise their prices, even though their costs for labor and materials have not changed. Within the standard wage-setting and price-setting framework, what is the direct mechanism that initiates the resulting inflation?
Upward Shift of the Phillips Curve due to a Negative Supply Shock
Distributional Conflict from Unexpected Inflation
Figure 4.20c: The Mechanism of Profit-Push Inflation
Effect of Low Unemployment on Worker Bargaining Power and the WS Curve
Figure 4.26: Profit-Push Inflation Due to Capacity Constraints
Academic and Central Bank Research on Post-Pandemic Corporate Markups (2022-2023)
Figure 4.25: Price Responses to Rising Employment and Capacity Utilization
Variable Markup and the Downward-Sloping PS Curve
Market Dynamics in the Automotive Parts Industry
Imagine a scenario where nearly all firms in a specific industry are operating at their maximum production capacity and are unable to meet the current level of customer demand. According to economic principles, what is the primary mechanism that allows individual firms in this industry to successfully increase their price markups over their costs?
Relationship Between Industry Capacity and Pricing Power
Following a natural disaster that damages most of the lumber mills in a region, the few remaining operational mills significantly increase the price of their wood products. This price hike is best and most completely explained by an increase in the operational costs (like labor and raw materials) for the mills that are still running.
Match each market scenario with the most likely resulting pressure on firms' price markups.
Analyzing Pricing Strategy in a High-Demand Market
A sudden and prolonged public health advisory leads to a massive, unexpected surge in demand for home exercise equipment. Arrange the following market events in the logical sequence that would typically follow.
Imagine the entire semiconductor industry is experiencing a massive surge in demand, leading all major manufacturers to operate at 100% of their production capabilities for an extended period. Consequently, they are all turning away new orders. During this time, nearly every manufacturer raises the price of their chips by 20%. Which of the following statements provides the most accurate economic explanation for why these firms can successfully implement such a significant price increase?
The entire global microchip industry is facing a severe shortage. All major manufacturers are operating at maximum production capacity and cannot fulfill all the orders they receive. In response to soaring microchip prices, a government proposes a regulation that would cap the price any manufacturer can charge at 10% above their verified production costs. Based on the economic principles of competition in such a market, what is the most likely outcome of this price cap policy?
After a series of unexpected supply chain disruptions, all major bicycle manufacturers in a country are operating at their maximum production limits and are unable to fulfill all incoming orders. With customers having very few alternative suppliers to turn to, the overall level of market competition decreases. This reduction in competitive pressure allows individual manufacturers to increase their price ____ over their costs.