Prices in most markets are determined as a mark-up over per unit wage costs, P = (W/a) x (1+z)....

Question:

Prices in most markets are determined as a mark-up over per unit wage costs, {eq}P = \left ( \frac{W}{a} \right ) \times \left ( 1+z \right ) {/eq}. Explain the factors underlying this price relation, as well as the underlying cause of inflation based on these same factors.

Markup Pricing:

Markup pricing is the difference between the sales price of a good or service and the cost of the good or of producing it. Markup is expressed as a percentage of the cost.

Answer and Explanation:

In the equation above, W represents that wage paid to the worker and "a" represents the number of units that a worker can produce over the time period that the wage is given. Therefore, this part of the equation represents the per unit wage costs. If an employee becomes more productive, then "a" increases and the per unit cost will decrease. Holding the rest of the equation constant, this will also cause the price to decrease. If, on the other hand, the wage increases, then the per unit wage cost will also increase, causing the price to increase. Over the long run, increases in the price level (also known as inflation), will result in increases in the wage. Therefore, inflation will directly impact the price of individual products through the corresponding increases in wages.

The other part of the equation is (1+z), where "z" represents that "markup" factor. This is the percentage markup that the firm is making on the price above the per unit wage cost. If the firm wants to increase profits it will increase its markup factor (z). This will increase price which adds to inflation.


Learn more about this topic:

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How to Calculate Markup: Definition & Formula

from Principles of Marketing: Help and Review

Chapter 12 / Lesson 22
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