Timing of Price-Level Changes A firm sets prices for its product or service and also determines the rates of pay, unless controlled by national agreement. An important element in determining prices and rates is their timing. The claim, for instance, that rates of pay have kept pace with inflation may have a variety of implications as regards total cost. At one extreAt the firm may adjust a rate or price for the coming year's level of inflation. At the other extreme, the firm may only adjust for inflation at the end of the year. The cost of adjusting pay levels is illustrated in Figure. The line D represents the daily pay rate, assuming that it is adjusted each day far tai rate of inflation. The area EDBF represents the cost of constantly maintaining the same rate of real pay. Immediate adjustment leaves the worker relatively better off by ABD; late adjustment leaves the worker worse off by DBC. In all cases the rate of pay at the end of the year will have kept pace with inflation. The amount of pay received will, however, be very different. A similar problem prevails in the timing of price increases and its effect on revenue. Increases may be small and frequent, following the DB line, or larger and less frequent, going via point A or C. If a single price change of 1/2DA is made, then the lost business by being above the DB line must be compared to business gained in the latter half of the year by being below the DB line. The relative changes in demand will depend upon the market's price-sensitivity. Where the market is very pricesensitive, it is likely that changes will have to be small and frequent to keep pace with other prices, e.g. petrol. Where the market is less sensitive, small differences in price over time may well not significantly affect demand. Such prices need not be adjusted as frequently, thereby reducing the cost of adjustment (see section 9.1). The implications for decisions are relatively clear. An annual 10 per cent increase in price levels, rates of pay, etc., does not necessarily mean that the total cost will increase by 10 per cent. A single increase at the end of the year will not chant cot it all henas a beginning of the year increase will increase costs by the full 10 per cent.