Define the prices and price level, Macroeconomics

Assignment Help:

Q. Define the Prices and price level?

Prices are of great significance in macroeconomics as undeniably they are in microeconomics. Though in microeconomics we are more interested in prices of individual services and goods and such prices are hardly important for the economy as a whole however there are exceptions (for instance, price of oil). In macroeconomics we are more interested in how prices change on average. We define the pricelevel like a weighted average of many different prices. 

If p1 is price of gasoline and p2 the price of oil then 10p1 + p2 is a price level. It's a weighted average of two prices with weights 10 and 1. Generally price level is defined using many more prices.

The reason for employing different weights is that some prices are more significant than others for the economy. Price of gasoline, for instance, is much more significant than price of paper clips. By using different weights we enable changes in some prices to have a larger effect on the price level than changes in other prices.

Exactly the prices which are included in the price level and weights which they carry may vary. Different choices give rise to different measures of price level. To visualize the prices and weights which are included, we use concept 'basket' of services andgoods.

We may, for instance, create a basket that contains all the goods sold by a particular store on a particular day. Price of this basket is then a price level - it would be a weighted average of the prices of goods sold that day and weights would be equal to the number of every good sold. Perhaps the basket comprises 100 litres of regular milk though only one frozen cake. Price of regular milk will then have a weight of 100 whereas the price of frozen cake will have a weight of 1. Changes in the price of milk will then have a larger influence on the price level than changes in price of frozen cake.

Note: in macroeconomics, it's common to use the term 'prices' or 'price' as short for price level. The expression 'prices rise'must be interpreted as 'the price level rises' - it doesn't mean that all prices rise.


Related Discussions:- Define the prices and price level

TRUE or FALSE, 1.the AD curve represents at the same time the demand for go...

1.the AD curve represents at the same time the demand for goods, money and labor in the economy 2.in the AS-AD model, higher competition among producers leads to a medium run equil

Enumerate the categories of firms in the circular flow, Firms in the circul...

Firms in the circular flow We divide all firms into 3 categories: F R comprises all firms which acquire raw material (farm products, iron ore and so on), F H all those that p

Hurricane or flood or a pandemic strikes, When a hurricane or flood or a pa...

When a hurricane or flood or a pandemic strikes a country, who is most likely to respond first?

GDP, Calculate the marginal cost and marginal analysis for the following ta...

Calculate the marginal cost and marginal analysis for the following table. Calculate the answers and insert them into the shaded cells. Units Produces Cost per Unit Total Cost Ma

Currency, Assume that Jimmy Cash has $2100 in his checking account and uses...

Assume that Jimmy Cash has $2100 in his checking account and uses his checking card to withdraw $210 from his ATM machine. By what amount did M1 change from this individual transac

Calculate private market equilibrium, Consider the following Marginal Priva...

Consider the following Marginal Private Cost (MPC), Marginal Social Cost (MSC) and market demand curves. These curves relate to a market for a product, the production of which gene

Governors of the federal reserve system, You should now find a press releas...

You should now find a press release from the Board of Governors of the Federal Reserve System, dated December 16, 2009, which discusses the decisions of the Federal Open Market Com

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd