MACRO ECONOMIC EQUILIBRIUM

An analysis of the use of AD and AS in macro equilibriumMACRO ECONOMIC EQUILIBRIUM12.2ALEARNING OBJECTIVESDefine aggregate demand and aggregate supplyDescribe the components of aggregate demand/supplyAnalyse the difference effects of changes aggregate demand and aggregate supplyREVIEW

What about market supply?So what do you remember about demand analysis? REVIEW EXERCISEUSE DEMAND AND SUPPLY ANALYSIS to clarify (explain) the general impact of a current event on equilibrium prices and quantities.

CREATE your own event!GROUP EXERCISEEvent: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months.Scenario 1: You manage a small firm that manufactures PCs.Scenario 2: You manage a small software company.

Perform a Demand/ Supply Analysis to show the effects of each of these on the marketInvestigating AGGREGATE DEMAND and AGGREGATE SUPPLYTHE MACRO ECONOMYQUESTION?How does the macro economy equilibriumdiffer from the micro economy?AD and ASAD - represents the demand side of the economy. AS represents the supply side

Some thoughtsThe AD/AS model represents all goodsand not just one single good.

It takes into account the price level of all goods aggregate output of the economy.GDP

Aggregate Demand

DefinitionAggregate meanstotal

AGGREGATE DEMANDAggregate demandis thedemandfor the gross domestic product (GDP) of a country, and is represented by this formula:

Aggregate Demand(AD) =

C + I + G + (X-M) COMPONENTS OF AD C + I + G + (X-M)

C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods.G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.

SLOPE OF THE AD CURVEThere is a negative relationship between aggregate demand and the price level.:

Aggregate demand rises as the price level falls. EFFECT OF AGGREGATE DEMANDTHE WEALTH EFFECTThe International Effect:The Interest Rate Effect:

so how does this effect aggregate demand?

Interest?Wealth?International activity?AD is the same in both the short run and the long run. Aggregate Demand represents how a change in a certain price level will change expenditures on all goods and services in an economy

REMEMBER!!!FACTORS THAT AFFECT AD

Aggregate Supply

DEFINITION Aggregate (AS) supply

measures theamount of goods and servicesproduced within the economy at a given price level.

LRAS vs SRASDifferent or the same?What do you think?What is the difference?

WHYAS represents the ability of an economy to deliver goods and services to meet demandLONG RUNSHORT RUN< One year> One yearAGGREGATE SUPPLY (AS)The Long-Run Aggregate Supply (LAS) no input prices are assumed to be constant. Thus, LAS is a representation of potential output.AGGREGATE SUPPLYIt consists of:Long-run Aggregate Supply (LAS) represents the most output that an economy can sustain (put up with). Short-run Aggregate Supply (SAS) represents the supply of the economy in the short run. LONG RUN ASThe LAS curve is vertical. It shows potential output. All prices, even input prices, rise when a rise in price level occurs.

LRASSince the LAS is POSSIBLE output it is shifted by the factors which affect potential outputFACTORS THAT AFFECT LRASavailable resourcescapital entrepreneurshiptechnological developments

As these LRAS SHIFTSAGGREGATE SUPPLY CURVES

SHORT RUN AGGREGATE SUPPLYONLY two variables (PRICE LEVEL and AGGREGATE REAL PRODUCTION) change * Everything else remains constantCETERIS PARIBUS OPERATES (IN SR ONLY)

SRAS is an UPWARD SLOPING CURVESHORT RUN ASShifts of the short-run aggregate supply curve can be brought about by such things as:

technology, changes in wages changes in other resource prices changes in resource quantities.The 3 ranges of AGGREGATE SUPPLY

QUESTIONDoes the level of aggregate supply remain the same in the short run? Analyse the impact of inflation and unemployment on SRASIs it possible to lower unemployment by raising inflation?