We are talking about globalisation and the recent manufacturing and construction slowdown. We present a novel globalisation model consisting of two countries, X and Y, each with domestic and foreign open-market systems. In each nation, we compare two pricing policies: short-run marginal cost, SRMC, versus fixed prices, P, over the business cycle. We are presenting a proposition and proof. With graphs for each country, we give a detailed numerical example. The key consequence is that P increases the volatility of Q demand over the cycle during the business cycle and increases market surplus in both countries under certain conditions. The numerical example shows a drawback of SRMC pricing under demand fluctuations—that the required price in high-demand times to balance accounts becomes extremely high. Consumers are better off with P , paying a small increase over SRMC in the off-peak, 6/7th of the time, to avoid the extremely large required price of SRMC in the peak times, because it’s only 1/7 of the time. The surprising point is that though peak times are infrequent, the prices and quantities at peak times, determine which pricing arrangement is better for consumers. The significance of my mathematical proof is to urge social focus on increasing and prolonging cyclical peaks.
Professor of Accounting, Ariel University, Ariel 40700 Israel.
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