PRICE AND OUTPUT ADJUSTMENT - MICRO FOUNDATIONS AND AGGREGATION

The paper deals with the derivation of aggregate price and output adjustment models from the micro-foundations of individual firms' behavior under monopolistic competition and uncertain demand. Aggregation over many firms to an industry and the economy as a whole is performed by using Divisia indices. There result, under alternative specifications of price expectations behavior and market structure, a number of simple estimable aggregate price and output adjustment equations that incorporate both cost factors, price expectations and demand variables in them. The appendix gives some partial illustrations of their empirical validity. © 1979.