Q8. Are all prices in the economy eq... [FREE SOLUTION]

Chapter 6: Q8. (page 129)

Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility over months or years?

Short Answer

Expert verified

No, not all prices in the economy are equally inflexible. The price of some goods adjusts more quickly than others.

Natural gas, corn, and airline tickets are goods whose prices show large amounts of short-run flexibility.

Haircuts, newspapers, and rental houses are some of the goods and services whose prices show a great deal of inflexibility over months and years.

Step by step solution

Concept of price inflexibility

The demand changes from time to time for goods in the market. The good price should also change according to the change in demand to remain at an equilibrium position where the supplied quantity is equal to the amount demanded. But prices are unable to adjust to these changes quickly. This resistive property of price is referred to as price inflexibility.

Example of goods with short-run price flexibility

Goods from the agriculture and retail sectors adjust their prices within 3 to 4 months. Goods such as natural gas, corn, and flight tickets are some of the goods whose prices adjust to the demand of the good quickly. The price of natural gas adjusts to the demand within days, the price of corn adjusts to the demand within weeks, and the price of flight tickets adjusts to the demand within hours.

Example of goods with price inflexibility

Goods whose prices show a great deal of inflexibility over months or years: Goods from the service and manufacturing sector usually take 8 months to a year to adjust their prices with the change in demand. For example, goods such as haircuts, newspapers, and rental houses take around a year to adjust their prices with demand changes. It shows that the price of these goods is highly inflexible to the changing demand.