4) Aggregate demand and supply

macroeconomic equilibrium

the level of national income at which leakages from the circular flow of income equal injections into the flow. where AD=AS

AD equation

comsumption + investment + govt spending + (exports -imports)

Aggregate demand

total demand for a county’s goods/services at a given price level in a given time period

AD curve slopes downwards because

at a lower price level the value of assets such as property and shares will increase in real terms

Aggregate supply

the total supply of goods and services produced within an economy at a given price level in a given time

the AS curve is upward sloping because

all firms aim to maximise profits and in the short run, cost of producing extra units of output increases as firms produce more output

causes of movements along AD and AS curves

changes in price level

extension/contraction on AD and AS curves

AD- extension is down curve, contraction is up curve. AS- extension is up curve, contraction is down curve

shifts in AD or AS curves

if the curves shift to a new position, the level of national income will change

factors determining AD - consumption

WUCIT - Wealth, Unemployment, Consumer confidence, Interest rates, Taxation

factors determining AD - investment

BITTA business confidence, interest rates, tax, technology, accelerator theory

factors determining AD - government expenditure

SLIP - Social welfare, Local govt, Interest on debt, Public services

factors determining AD- net exports

EFI - Exchange rates, Foreign growth, Inflation

multiplier

relationship between a change in AD and the resulting, usually larger, change in national income.

size of multiplier equation

changing in national income divided by initial change in AD

long run aggregate supply

real output that can be supplied when the economy is on it’s ppf. when all available factors of production are employed

underlying rate of growth

the long run average growth rate for a country over a period of time. determined by quantities of CELL, and they also determine the position of the LRAS

economic shock

an unexpected event hitting the economy. they can be demand-side or supply-side shocks, and unfavourable or favourable

short run aggregate supply

the period of time during which the prices of the factors of production are at a constant level

determinants of short run aggregate supply

WEPPT wages, exchange rates, prices of raw materials, productivity, taxation,

determinants of long run aggregate supply

FEETP - factor mobility, enterprise, economic incentives and attitudes, technology, productivity

percentage of each AD component

C = 60-70%

I = 18-29%

G = 20%

(X-M) = -5%

What will shift the AD curve

if there is an increase or decrease in the factors that affect AD. (C,I,G,(X-M))

what influences the level of consumption?

interest rates

current level of income

future expected levels of income

animal spirits

refers to the mix of confidence, trust, mood and future expectations, and they can fluctuate quickly as people change their thinking. they are the driving force that gets people going in the economy

factors affecting household saving

• real interest rates

• price expectations

• availability of credit

• unemployment/job security

• consumer confidence

multiplier formula

1/marginal propensity to withdraw (MPW)

factors influencing investment

• rate of interest

• expected future sales

• relative price of capital and labour

• impact of govt policies

motivations for business investment

• seeking higher profit

• raise productivity and lower costs

• investment to meet the investment of rival firms

• higher market share

• extra capacity to meet rising consumer demand

negative accelerator effect

when the rate of growth of demand in an industry slows, then the net investment spending by businesses often falls

fiscal policy

the manipulation of taxes, spending and borrowing to influence macroeconomic objectives through the level and growth of AD, output and employment