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

What are the market interest rates, What are the Market interest rates ...

What are the Market interest rates The most important interest rates from a macroeconomic perspective are interest rates that the government pays on the loans they use to finan

What is national income, Recognize which of the following purchases is coun...

Recognize which of the following purchases is counted as a part of NI: a) Tata motors purchases tire from Good year to equip latest Indica. b) Tata motors purchases tires fr

Moodys and standard & poors study corporations, Firms such a Moody's and St...

Firms such a Moody's and Standard &Poor's study corporations that issue bonds. They publish "ratings" for the bonds- evaluation of the likelihood of default. Suppose these rating c

Long run imports will most likely be paid, In the long run, imports will mo...

In the long run, imports will most likely be paid for with: a. Aexports. b. The sale of real and financial assets. c. the extension of credit. d. higher domestic unempl

Federal income tax be changed to a flat tax, Take a position on the followi...

Take a position on the following economic issue in the "yes" or "no" selection, support your position with economic theory and critical thinking skills. ISSUE: Should the Feder

Set up a diagram.., (a) Use this information to set up a diagram showing th...

(a) Use this information to set up a diagram showing the firm''s total revenue and total cost schedules. In this diagram, show the points at which the firm is maximizing profits.

Montary policy, Examine the efficiency of quanttitative credit control inst...

Examine the efficiency of quanttitative credit control instrument

Determine the value of the goverment expenditure multiplier, Assume that th...

Assume that the economy is characterized by the following structural equations: C = 160 + 0.6 (4 - T) I = 150; G = 150; T = 100. a) Determine the equilibrium output level

Supply function for product, Suppose the supply function for product X is g...

Suppose the supply function for product X is given by Qsx = -50 + 0.5Px - 5Pz. A. How much of product X is produced when Px = $500 and Pz = $30? B. How much of product X is p

Flossy''s budget constraint, Flossy has a quasi-linear utility function, 16...

Flossy has a quasi-linear utility function, 16q1^0.5 + q2. The price of good 1 is fixed at one. Thus, Flossy's budget constraint is q1 + p2q2 =Y, where Y denotes income. 6.1 Compu

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