The Upward-Sloping Economy-Wide Wage-Setting (WS) Curve

The WS-PS Model

Partial Equilibrium Foundations of the Supply-Side Model

Core Components of the Aggregate Supply-Side Model

The aggregate economy model is structured in two parts, each reflecting a fundamental type of decision made at the firm level. Match each part of the model with the economic interaction it primarily represents.

Imagine an economy where new legislation significantly strengthens the bargaining power of labor unions, leading to more favorable wage negotiations for workers across all industries. According to the foundational two-part structure of the aggregate economy model, which of the two core firm-level decisions is most directly impacted by this development?

Rationale for the Aggregate Model's Structure

The two-part structure of the aggregate economy model treats firm-level wage-setting and price-setting as completely separate and non-interacting processes to simplify the analysis of the labor and goods markets respectively.

Analyzing Market Competition Changes

Arrange the following statements into the correct logical sequence that describes the construction of the two-part aggregate economy model.

An economy experiences a widespread, significant decrease in the cost of imported raw materials used by all domestic firms. Within the two-part framework for the aggregate economy, which is built from firm-level behaviors, this change would most directly influence the component derived from firms' ____.

A large corporation announces it is giving all its employees a 5% pay raise. In the same announcement, it states that the prices of its products will also increase by 5% to cover the higher labor costs. How does this scenario relate to the foundational two-part structure of the aggregate economy model, which is built from firm-level behaviors?

Match each market characteristic with its most likely effect on competition and consumer welfare.

Definition of the Price-Setting (PS) Curve