Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/203874 
Year of Publication: 
1998
Series/Report no.: 
wiiw Working Paper No. 9
Publisher: 
The Vienna Institute for International Economic Studies (wiiw), Vienna
Abstract: 
This paper analyses the dynamic interaction between profit maximization and aggregate demand through two alternative theories of price and output adjustment. According to the neoclassical interpretation, excess aggregate demand drives up price, which in turn reduces the real wage rate to induce profit-maximizing firms to produce more. In the alternative view, excess demand generates non-price signals like longer order books or decumulation of inventories inducing firms to produce more. This affects marginal cost at higher production. Firms experiencing decreasing returns in the short period in a competitive market cover higher marginal cost through upward price adjustment, making real wage an outcome, but not a determinant of the output level. The disregard of this latter view has led to logically inconsistent constructions like aggregate demand/supply analysis of many recent textbooks, and a misleading 'monetarist' interpretation of the Phillips curve.
Subjects: 
Aggregate demand (AD)
aggregate supply (AS)
concept of derived aggregate demand (DAD)
aggregate demand versus profit maximization
output versus price adjustment
JEL: 
A10
B41
E12
E13
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.