Q10. Do prices tend to become more fl... [FREE SOLUTION]

Chapter 6: Q10. (page 129)

Do prices tend to become more flexible or less flexible as time passes? Explain.

Short Answer

Expert verified

Prices tend to become more flexible with time due to the adjustment of inputs and their costs.

Step by step solution

Concept of price inflexibility.

The resistive nature of prices to adjust with the change in supply and demand forces of goods in the short run is price inflexibility.For instance, if the economy faces a positive demand shock, but the price of a good remains the same in the short run, the price is highly inflexible. And if the good price adjusts to the demand shock, it shows a highly flexible nature.

Suppose the price of a dress is $20. During the festive season, the demand for cloth increases, but the company does not increase its price despite the increased demand because of huge competition in the clothing industry. It shows that the price of the dress is inflexible in the short run.

Price flexibility over time.

In the short run, prices tend to show a resistive nature or are sticky. This is due to the unadjusted expectations of workers and the presence of fixed inputs that take time to adjust to changing demand and production requirements. The firms cannot change the size of the plants or buy equipment, real wages do not show any rise, and hence prices are considered inflexible in the short run.

The 鈥榬esistive property鈥� of prices recedes with time. The rigidity of prices fades away in the long run as the suppliers can adjust all their inputs according to the changing demand. Workers are able to set their expectations appropriately. Hence, in the long term, the firms adjust the price of their goods according to the overall outcome created due to market fluctuations.

Thus, one can conclude prices tend to become more flexible as time passes.