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Price Rigidity and Wage Rigidity: Market Failure or Market Efficiency

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  • Chao Chiung Ting

Abstract

We observe that money wage and price level are not only rigid but also flexible in different business cycles. For example, there are inflationary recessions (e.g., oil crisis in U.S.) versus deflationary recessions (e.g., Great Depression between 1929 and 1933) as well as price rigidity (e.g., Great Depression between 1934 and 1939). Thus, the general price theory, including wage, should explain both price flexibility and price rigidity. When demand curve shifts during business cycle, the best strategy of the firm is to adjust capital and labor (i.e., size of the firm) so as to shift supply curve toward the same direction as demand curve shifts. If both supply curve and demand curve shift toward the same direction proportionally, there is perfect price rigidity. When product price is rigid, the firm is willing to pay previous wage. Thus, price rigidity and wage rigidity are effect (i.e., not only ex-post phenomenon that we observe but also endogenous market efficiency that arises from to the coordination of supply and demand), not exogenous market failure to disturb economy.

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  • Chao Chiung Ting, 2017. "Price Rigidity and Wage Rigidity: Market Failure or Market Efficiency," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 82-91, November.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:11:p:82-91
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    Cited by:

    1. Chao Chiung Ting, 2022. "Pollution, Production Efficiency and Economic Growth: A Synthesis," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(9), pages 1-1, September.

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    More about this item

    Keywords

    price rigidity; wage rigidity; menu cost; price setting; business cycle; monetary policy; market failure; market efficiency;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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