Editing Phillips curve (section)

====Pricing decisions====
Next, there is price behavior. The standard assumption is that markets are ''imperfectly competitive'', where most businesses have some power to set prices. So the model assumes that the average business sets a unit price ('''P''') as a mark-up ('''M''') over the [[unit labor cost]] in production measured at a standard rate of capacity utilization (say, at 90 percent use of plant and equipment) and then adds in the unit materials cost.

The standardization involves later ignoring deviations from the trend in labor productivity. For example, assume that the growth of labor productivity is the same as that in the trend and that current productivity equals its trend value:

: '''gZ''' = '''gZ<sup>T</sup>''' and '''Z''' = '''Z<sup>T</sup>'''.

The markup reflects both the firm's degree of market power and the extent to which overhead costs have to be paid. Put another way, all else equal, '''M''' rises with the firm's power to set prices or with a rise of overhead costs relative to total costs.

So pricing follows this equation:

:'''P''' = '''M''' × ('''unit labor cost''') + '''(unit materials cost)'''

:: = '''M''' × ('''total production employment cost''')/('''quantity of output''') + '''UMC'''.

'''UMC''' is unit raw materials cost (total raw materials costs divided by total output). So the equation can be restated as:

:'''P ''' = ''' M ''' × ('''production employment cost per worker''')/('''output per production employee''') + ''' UMC'''.

This equation can again be stated as:

:'''P''' = '''M'''×('''average money wage''')/('''production labor productivity''') + '''UMC'''

:: = '''M'''×('''W'''/'''Z''') + '''UMC'''.

Now, assume that both the average price/cost mark-up ('''M''') and '''UMC''' are constant. On the other hand, labor productivity grows, as before.  Thus, an equation determining the price inflation rate ('''gP''') is:

: '''gP''' = '''gW''' − '''gZ<sup>T</sup>'''.