A Micro-Macroeconomic Analysis Based on a Representative Firm: Progress Report

Abstract

I developed in Ng (1982), referred to below as the first paper, a method of economic analysis incorporating elements of micro, macro, and general equilibrium to examine the effects of industry-wide or economy-wide changes in demand, costs, expectation, etc. on the average price and aggregate output (denoted mesoeconomics for ease of reference). The analysis is to be extended and applied in a number of directions in Ng (forthcoming, referred to below as the further study). This chapter outlines the main elements and some results of the basic model (the first section) and extensions (the third section) in non-mathematical terms, as well as illustrating a non-traditional result (possibility of real expansion/ contraction with no effect on the price level in an equilibrium framework with realized expectations, no lags, no misinformation, etc.) in terms of the (real-wage) demand curve for labour (the second section). A remarkable aspect is that, with the conditions for the non-traditional result prevailing, the classical dichotomy between the real and monetary sectors is broken and we have: (i) aggregate demand curve for labour is lifted by an increase in nominal aggregate demand, or alternatively interpreted, (ii) the aggregate demand curve for labour is not the horizontal summation of the individual firm’s demand curves. The practical possibility of this non-traditional result is increased if some firms are profit-constrained revenue-maximizers (see section entitled ‘Profit-constrained Revenue-maximizing firms on p. 227) and/or if (with the addition of a government sector) the possibility of changing tax-rates is considered (Ng and McGregor, 1983).

I am grateful to my colleague, Lachie McGregor, for his helpful comments.