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

Two quarters of increasing levels of production, After two quarters of incr...

After two quarters of increasing levels of production, the CEO of Canadian Fabrication & Design was upset to learn that, during this time of expansion, productivity of the newly hi

Illustrate an example of consumer price index, Illustrate an example of Con...

Illustrate an example of Consumer Price Index For instance, if we spend twice as much on apples as on pears, apples would have twice the weight in basket. The precise details o

Compute the lost social welfare, Consider a market where supply and demand ...

Consider a market where supply and demand are given by QXS = -18 + PX and QXd = 90 - 2PX. Suppose the government imposes a price floor of $41, and agrees to purchase any and all un

Economics, what is a limitation of nation income

what is a limitation of nation income

Elucidate own small building company, You operate your own small building c...

You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway

Eco, illustrate and discuss the implications of various market structures (...

illustrate and discuss the implications of various market structures (competitive and non-competitive)for price determination.

Analyse manipulating monetary policy, Buckley (2009) writes that the UK was...

Buckley (2009) writes that the UK was in recession for several short periods during this time, which placed further emphasis on researchingrelationships between the price of oil an

Explain negatively impacted productivity of the project, Describe your most...

Describe your most positive experience in working on a group project in which the group's cohesiveness led to greater work productivity. Have you experienced a situation that was j

Explain the consumer prices index, Consumer Prices Index Two economic ...

Consumer Prices Index Two economic indices learnt at AS are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Both are used to calculate the average price lev

Block exogeneity test, From Tables 3A to 3F in the Appendix the results fro...

From Tables 3A to 3F in the Appendix the results from VAR/Block Exogeneity Granger Causality Test are that the oil price variable does Granger cause both Inflation and interest rat

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