ECON 102 Lecture Notes - Lecture 3: Nominal Rigidity, Longrun
Document Summary
If prices of goods and services could always adjust quickly to unexpected changes in demand. The economy could always produce at its optimal capacity. Since prices would adjust to ensure that the quantity demanded of each good and service would always equal the quantity supplied. Demand shocks and sticky prices (short and medium run) In reality, many prices are inflexible and do not change rapidly when demand changes unexpectedly. Manufacturing firms typically attempt to deal with unexpected changes in demand by maintaining an inventory. If demand falls for many goods and services across the entire economy for an extended period of time, many firms will find inventories piling up, forcing them to cut production resulting in a recession. If demand is unexpectedly high for a prolonged period of time, the economy booms. Sticky prices are product prices that remain the same (at least for a while), even though supply/demand has changed.
