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Essay On Micro Economics
Wage and Price Flexibility
Neoclassical economists argue that wages and prices are more flexible than Keynesian economists believe. While neoclassical supporters admit that wages and prices are somewhat sticky in the short-run, they insist that they are not as sticky as Keynesians claim. Neoclassical economists go on to say that the longer the period of time that passes the greater is price flexibility. This means that the self-correcting mechanism actually exists and its existence sharply reduces the need for government intervention in the economy (Edgeworth, 1904).
Neoclassical Aggregate Supply Curve
In neoclassical theory, there are two aggregate supply curves. One, the long-run AS curve is vertical at the natural rate of employment. The second, the short-run AS curve, is upward sloping to the right (Clark, 1891).
The long-run AS curve is vertical because at the natural rate of output, that is all the output we can produce with a ìnormalî portion of our resources unemployed. For example, if the natural unemployment rate is 5%, then the natural rate of output is all we can produce with 5% of our labor resource not being used. The price level we are willing to pay for this output has nothing to do with how much output is being produced.
It is important to realize that when we are at the natural rate of output, there is no money illusion (because we are in the long run). Nor is there an opportunity to take advantage of an increase in the selling price of our product when there has been no corresponding increase in the cost of producing that good. This will be explained in a moment (Clark, 1891).
The short-run AS curve is upward sloping to the right. This means that output and price are positively related. If price rises, output will rise as well......
