3.4-3.6

Supply Curve and Inflation

  • The supply curve can shift to the left due to various factors, notably the phenomenon of stickiness.

  • Stickiness refers to the reluctance of prices to change, which can impact company pricing strategies and supply levels.

    • When stickiness goes away, companies must pay full price for their inputs and resources.

    • As a result, they may cut back on supply due to increased costs leading to inflation.

  • It is important to remember that:

    • As inventory supply decreases, the price level tends to increase.

Types of Inflation

  • Demand Pull Inflation:

    • Defined as a rightward shift of the aggregate demand (AD) curve.

  • Cost Push Inflation:

    • Occurs when there is a decrease in supply, represented as a leftward shift in the supply curve.

Productivity and Economic Impact

  • Increased productivity is typically a factor of aggregate supply (AS), not aggregate demand (AD).

  • Identification of productivity affects:

    • Supply Increase: Productivity improvements allow companies to produce goods more efficiently, leading to an increased output supply.

  • Output and labor dynamics:

    • As output increases, the demand for labor also increases, leading to higher employment levels.

    • Higher employment generally results in increased income among workers.

Analyzing Economic Questions

  • When analyzing economic implications of questions:

    • Focus on attributes of either supply or demand.

    • Use the process of elimination based on the relationship between productivity, employment, and income.

  • Example Breakdown:

    • An increase in supply will increase output and thus employment.

    • Higher employment leads to an increase in income earned by workers.

Stagflation

  • Defined as a situation where inflation and unemployment are both high, often caused by a leftward shift in the supply curve.

  • To identify stagflation causes:

    • Eliminate options that relate to aggregate demand (AD) changes,

    • Focus on reductions in supply factors like energy costs that can lead to stagflation.

Taxes and Their Effects on Aggregate Demand and Supply

  • Increasing personal income taxes reduces disposable income, resulting in decreased consumption.

  • Consumption is a vital component of aggregate demand (C in AD = C + I + G + X) and any decrease in consumption shifts the AD curve to the left.

  • Understanding the impact of taxation on supply and productivity:

    • Recognize that supply changes are impacted by Resource prices, Government action, and Productivity (abbreviated as R.A.P.).

Changes in Supply and Production Costs

  • When firms restructure operations to reduce costs, the supply curve shifts to the right leading to:

    • Increased supply, resulting in a lower price level.

Analyzing Inflation and Unemployment Relations

  • To understand how certain factors affect inflation and unemployment:

    • Focus first on inflation and identify components within AD that could increase inflation (i.e., AD factors).

    • Then analyze factors that affect unemployment and determine the relationship between increased supply and decreased unemployment.

Theories of Economic Approach

  • Two primary theories that conceptualize economic methods:

    • Classical Theory: Emphasizes self-regulating markets and the long-term growth of the economy.

    • Indonesian Theory: Refers to a different approach that may include specific market dynamics not covered by classical theory.