Which theory best explains why cost of living adapts to average income so well across countries
One model of prices is marginal cost. If good is fungible and barriers to entry are low competitive markets drive prices down to the breakeven point
Another is willingness to pay: suppliers drive price to what they can, how much the marginal consumer would pay. Supplier(s) collude to set this price
The reason this happens is players are payoff maximizing. This is GTO for rational econs
Which theory best explains why cost of living adapts to ave…
I pay the laborer the lowest he is willing to take, no more
Which is, at the margin, the price for food and shelter so he can work and survive
But if someone will pay him more, I am bid up to that price. But if they are paying too much they will go out of business, and laborer will take my job
Then what is the price of food and shelter? As much as the laborer will pay, which depends on his income
There’s circularity here or some kind of simultaneous decision making problem
Thinking isn’t clear, could use a different model
I pay the laborer the lowest he is willing to take, no more…
What is real is productivity of labor and capital, and what society can produce per capita. This is a physical law
The distribution is what determines price level and there is an “evening out” between income and spend
So the real phenomena is the relativity equal distribution of productivity
Which I think is called globalization