Question

In your own words, describe what happens when firms and workers underestimate future prices in the economy. Focus your answer on what would happen to actual output as opposed to the expected potential output.

Your response must be at least 500 words in length.

Answer 1

If firms and workers underestimate future price in the economy, it means inflation become a self fulfilling prophecy .If there is inflation and the workers’ demands for the high wages to compensate their high living standard. If workers succeed in bargaining in the rate of wages ,it enhance Inflation.

And when firm is price taker it means there is perfect completion market as the decisions of wages depends upon the wokers.Economic efficiency is an economic state in which every resources is firms and industries ,efficient consumption decisions by individual, this situation called economic efficiency.

As per the question when firms and workers underestimate future price in the economy it reaches it Breakeven price is the amount of money, or change in the value for which an asset must be sold at the cost of acquiring and owning it. It means also refer to the amount of money for which a product or services must be sold to cover the costs of manufacturing or to providing it.The shutdown price are the conditions and price where firm will decide to stop producing .it occurs where AR<AVC.The shutdown price is said to be occur ,where price ( average variable cost) .At this price AR<AVC ,the firm is making an operating loss.

Weather, Potential output refers to the natural gross domestic product means the highest level of real gross domestic product that can be sustained over the long term. It means actual Output happens in real life while potential output shows the level that could be achieved by upgrading the output. A positive output gap occurs when the real output is more than full capacity output and if it will be more than full capacity ,or slack ,in the economy due to weak demand of product. And the positive output gap signifies high rate of demand in goods and services in the economy And it refers to the inflation in the economy because as both the labor cost as well as price of goods and services   increases to the response to the increased demand.

GDP actual- GDP potential/ GDP potential.

Growth in the strength of the working population enables an economy to increase the potential output .This target can be achieved by natural growth . Policy maker of firm uses the inflation to focus th e level of output consistent with zero pressure for prices to rise or fall below the potential output over time ,price which reflect weak demand. When actual gross domestic exceeds potential full employment GDP, the other being a recessionary gap.

It can be produced if the economy operating at maximum sustainable employment and the unemployment at its natural rate.

Potential output depends upon on the supply side, the number of engaged workers into firm in production and development process,

Potential output also depends on the situation of boom and drop below it during a recession ,on an average and till the gravitate towards it.any firm and business does not stay at fixed situation and it has to face ups and downs, Labor demands high wages and inflation falls below target.