Fixprice

Background

The term “fixprice” refers to an economic model wherein prices remain fixed or rigid in the short run while quantities adjust to economic changes more rapidly. This concept is foundational in the analysis of certain economic behaviors, particularly those postulated in Keynesian economics.

Historical Context

The fixprice model gained prominence through its association with Keynesian economics during the mid-20th century, a response to the limitations of classical economics in explaining prolonged periods of high unemployment during the Great Depression. Subsequently, New Keynesian economics provided theoretical underpinnings that justify price rigidity based on factors like menu costs and wage stickiness.

Definitions and Concepts

Fixprice: An economic model where prices are assumed to be rigid or fixed in the short run, causing quantities (such as output and employment) to adjust faster than prices in response to changes in supply and demand.

Key Characteristics:

• Short-run Price Rigidity: Prices do not change quickly in response to changes in market conditions.
• Quantity Adjustment: Output and employment levels adjust more rapidly to equilibriate the market.
• Theoretical Roots: Heavily explored within the realm of Keynesian and New Keynesian economics.

Contrasting model:

• Flexprice: A model where quantities are fixed in the short-run and prices adjust quickly to match supply and demand changes.

Major Analytical Frameworks

Classical Economics

• Prefers the notion of flexible prices and wages.
• Market self-equilibrates through price adjustments with minimal government intervention.

Neoclassical Economics

• Assumes rational actors and flexible prices.
• Emphasizes market clearing where supply equals demand through price adjustments.

Keynesian Economics

• Developed in response to the Great Depression.
• Argues that price and wage rigidity can lead to unemployment and output fluctuations.
• Advocates for policy interventions to stabilize the economy.

New Keynesian Economics

• Provides microeconomic foundations for price rigidity:
  • Menu Costs: Costs associated with changing prices discourage frequent adjustments.
  • Wage Stickiness: Long-term contracts and worker morale issues cause wages to be sticky.
• Supports the idea that small market imperfections can lead to significant macroeconomic impacts.

Marxian Economics

• Focuses less on price rigidity and more on inherent instabilities and crises of capitalism.
• Examines labor exploitation as the driver of economic dynamics.

Institutional Economics

• Studies how institutional factors like regulations and social norms affect economic performance.
• Would examine price rigidity within the context of market and institutional settings.

Behavioral Economics

• Challenges the notion of fully rational actors.
• Investigates how bounded rationality and psychological factors contribute to price rigidity.

Post-Keynesian Economics

• Expands on Keynesian economics while diverging from mainstream New Keynesian models.
• Emphasizes the historical and dynamic nature of economic processes, often including price-setting behavior among firms.

Austrian Economics

• Advocates for individual choice and market self-regulation.
• Much less emphasis on price rigidity which is not typically a focal point in Austrian thought.

Development Economics

• Examines economic issues affecting developing countries.
• Price rigidity might be explored in terms of its impact on market structures and developing economies.

Monetarism

• Focuses on the role of government’s money supply management to control inflation and economic cycles.
• Often in assumed with flexible prices which contrasts with Keynesian fixprice perspective.

Comparative Analysis

Fixprice and flexprice models highlight contrasting views on how economies adjust to changes in economic conditions. The practical relevance of each model depends on institutional settings, macroeconomic goals, and policy considerations such as inflation control, employment optimization, and economic growth stimulation.

Case Studies

• Great Depression Analysis - Employed to understand prolonged unemployment and deflationary pressures seen globally in the 1930s.
• Modern Fiscal Policies - Implementation of fiscal stimulus based on the assumption that price rigidity requires governmental intervention for economic stabilization.

Suggested Books for Further Studies

1. “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
2. “Keynesian Economics” by Kenneth K. Kurihara
3. “Foundations of Post-Keynesian Economic Analysis” by Marc Lavoie
4. “Handbook of New Keynesian Economics” edited by Harald Uhlig and John B. Taylor

Related Terms with Definitions

• Price Rigidity: The phenomenon where prices do not adjust quickly to changes in economic conditions.
• Menu Costs: The costs incurred by firms when changing prices.
• Wage Stickiness: Resistance to wage changes in response to economic conditions.
• Flexprice: An economic model where quantities are fixed in the short-run, and prices adjust more rapidly.
• **Key

Quiz