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

Define economics, What is the study of economics about?

What is the study of economics about?

Real exchange rates, Real Exchange Rates (EXCH) is the next variable that w...

Real Exchange Rates (EXCH) is the next variable that will be analysed in this VAR. The reason for including exchange rates in the VAR is that they are an important channel through

Labor is continuously compounded, Function given: Qt=A0Lt^6Kt^4, Lt=L0e^.03...

Function given: Qt=A0Lt^6Kt^4, Lt=L0e^.03t, Kt=K0e^.02t 1. Growth of labor is continuously compounded at 3% 2. Growth of Capital is continuously compounded at 2% Solve:

Adf test, Table Summary of results from the ADF test ...

Table Summary of results from the ADF test Test Number Oil GDP Interest rate Inflation Unemployment Exc

Find the compensating variation , Joe has preferences over pizza (p) and be...

Joe has preferences over pizza (p) and beer (b) given by U = pb. The marginal utilities are MU p = b and MU b = p, and Joe's income is I = 60. 1. Find Joe's optimal consumptio

High blood pressure affected, To determine whether high blood pressure affe...

To determine whether high blood pressure affected whether a person had a stroke, a sample of 129 people who had had strokes are examined. In the sample, 39% had high blood pressure

Explain the problem involved in consumer price index, Q. Explain the proble...

Q. Explain the problem involved in consumer price Index? To explain the problems involved in calculating CPI we consider MP3 players. If you measure the average price of MP3 pl

Mathematical solution for, given the market demand curve is P=a-bQ and MC=D...

given the market demand curve is P=a-bQ and MC=D. derive mathematicaly a perfect compettition, B monopoloy, C, Cournot Duopoly, D cournot Tipopoly, E cournot quadropoly, F Stackleb

Monetary Policy.., Suppose the banking system has reserve of $750000, deman...

Suppose the banking system has reserve of $750000, demand deposits of $2500000 and a reserve requirement of 20%. a. if the fed now purchases $125,000 worth of govt bonds from the

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