Demand and Supply are linked with Employment...

The capital and labour are the two important factors of production which add to the cost of production and prices, the cost is an important determinant of productivity and competitiveness in the terms of demand and supply, both, and innovation may also increase these two. The demand and supply competitiveness increase when the ability of firms to produce and sell increase and the ability of people to demand also increases, otherthings remaining constant. A lower cost and price increase competitiveness and productivity and a higher cost and price would decrease competitiveness and productivity because it might reduce supply and demand and prices employment and demand further. In short, to increase competitiveness and productivity it is important to reduce cost of production, capital and labour costs are managed by the central bank through interest rate to incentivize or disincentivize businesses while following the objective of full employment and price stability. However, the price of labour or wages are determined by the demand and supply of labour in the economy and are indirectly managed, we do not have any institution to decide wages in the labour market, the central bank indirectly manages demand and employment and wages through the borrowing cost. The central bank manages demand and supply, both, through the borrowing cost, therefore it is important to keep the borrowing cost low to achieve the objective of price stability and full employment, borrowing cost too add to the cost of the economy and prices which could be lowered to increase demand and supply, both, different names of the same economic activity. When the borrowing cost is lowered it increases employment which increases supply by increasing production and also increase demand by increasing employment and wages, therefore it is not plausible to view demand and supply as separate from each other as both are functions of the money supply and the borrowing cost. Employment is important for demand and supply which determines the price level, higher employment or full employment means full demand and supply and stable prices and vice versa. The central bank usually overlooks this aspect when increasing the borrowing cost, it views that it is controlling demand to tame prices, but forgets that it would also reduce supply and employment and demand, both. Moreover, it misses to increase supply which has a positive correlation with lower borrowing cost and prices and demand. Lower borrowing cost and prices could help increase the demand and supply upto full employment after which lower borrowing cost would also help imports and contain the prices. Notwithstanding, if the central bank tries to contain either demand and/or supply through the borrowing cost it would affect businesses negatively with swings in the trade cycles, but if the central banks try to adjust the borrowing cost low and stable it would help sustain demand and supply at full employment. Lower borrowing cost and prices would help increase employment, (real) wages and savings and investment. The central banks are waiting for wage inflation after full employment because relative prices due to the lower borrowing cost compared to wages would go down. By keeping the borrowing cost low the banks might allow real wages and demand to go up which may help contain demand, supply, employment and prices. The lower borrowing cost could help increase competitiveness if wages are increasing. History has seen less periods of wage inflation than commodity inflation. Paul Krugman is largely true when he says that the central banks are confronted with a novel situation when they are expecting wage inflation instead of commodity inflation like oil price inflation in the past. No central banks in the past have tightened explicitly due to wage inflation which could be good for demand and supply. Higher wages could increase the supply of labour and demand, but how fast that is a question. Higher wages could increase the population rate of growth or immigration or just imports which is also favourable for domestic and global growth and demand.  

Lower prices increase competitiveness, demand and supply, both...

Normally, the economists view higher prices and inflation and expectations to cut real interest rate, real wages and real exchange rate and expectations to make the economy competitive domestically and externally or globally in order to incentivize demand and supply, and, investment and employment, and expectations to achieve the equilibrium, or NAIRU – the non accelerating inflation rate of unemployment, of full employment growth rate and expectations. But, they fail to recognize that inflation reduces real spending and savings and investment and employment and expectations while increasing the nominal interest rate, nominal wages and the nominal exchange rate which makes the economy lose competitiveness and demand and supply, however exports may increase through higher exchange rate. They think that higher prices would incentivize the supply side to increase employment and demand, but when prices increase, they negatively affect demand and spending first and then lower savings and investment and employment and expectations which would lower growth and expectations. Generally, people expect that price of everything increase in the long run so they need higher incomes and savings to achieve the desired standard of living. Nonetheless, if people expect higher prices in the future they might rush to buy which could further increase demand and prices, inverse of the expectation that lower prices would delay spending and it would again lower the prices. This has been observed by the Knife Edge Problem due to expectations; lower growth and price expectations are cumulative in effect and also produce trade cycles and vice versa. The higher prices to increase investment and supply first reduce demand which might set the precedent for lower prices because supply would outpace demand due to lower real wages despite employment, higher prices cut real wages and demand as experienced by the developed countries, inflation and lower real wages have reduced demand relative to supply, even though investment and employment has increased which has lowered price and growth expectations.

Notwithstanding, if we assume lower prices it would increase real interest rate, real wages and the exchange rate which would increase demand and spending and savings and investment and supply and expectations.

Economists think that lower real wages, real interest rate and exchange rate incentivize supply, but they reduce domestic demand and imports, but increases exports which also depend on the external demand and global growth and are sometimes uncertain. Nevertheless,  higher real wages, real interest rate and real exchange rate increase domestic demand, imports and exports due to higher spending and savings and investment to achieve full employment, lower prices would also help contain cost and increase competitiveness and supply.