Chapter 11: Aggregate Demand and Aggregate Supply - PowerPoint PPT Presentation


Title: Chapter 11: Aggregate Demand and Aggregate Supply


1
Chapter 11 Aggregate Demand and Aggregate Supply
  • Content and Visuals taken from McConnell/Brues
    Economics

2
Overview
  • 3 big ideas
  • Aggregate Demand
  • Aggregate Supply
  • Equilibrium

3
Aggregate Demand
  • Shows the amount of REAL outputs that buyers
    desire to purchase at each possible price level
  • Essentially shows how much all of us together buy
  • Like micro, always represented by a downward
    sloping linebuy why?

4
Explained
  • In MICRO, there are 3 reasons for downward
    slopewhat are they?
  • Income Effect, Substitution Effect, and Law of
    Diminishing Marginal Utility
  • In MACRO the 3 reasons are different
  • REAL-BALANCES EFFECT, INTEREST-RATE EFFECT,
    FOREIGN PURCHASES EFFECT

5
(No Transcript)
6
More EXPLAINED
  • Real-balances effecthigher prices mean we cannot
    buy as much so we are more likely to save
  • Interest-rate Effectat a lower rate we will
    borrow more, at higher rate borrow less,
    effecting how much we can buy overall
  • Foreign Purchases effectif our prices are
    higher, we are more likely to buy cheaper imports

7
(No Transcript)
8
Aggregate Supply
  • Amount of REAL domestic output that will be
    produced at each price level
  • Big difference in response between LONG RUN and
    SHORT RUN
  • In long run, everything can respond/change,
    including wages
  • In short run, only inputs can changewages
    sticky

9
Keynesian Curve
  • 3 distinct parts culminating at vertical
  • Input costs will most determine where curve
    is75 of costs from labor
  • PRODUCTIVITY and capital deepening WILL ALSO
    AFFECT CURVE
  • Govt can influence through taxes and subsidies

10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
Equilibrium
  • HAPPY price and output
  • Anything above this point will discourage
    spending (inflation) and reduce outputanything
    below will encourage spending and increase output

14
(No Transcript)
15
Few Additions
  • Deflationprices actually go down
  • Disinflationstill inflation but at a lower level
  • Efficiency Wageswage that produces best results
    in productivitydoesnt have to be lowest wage if
    produce more at higher pay (SHEETZ)
  • Menu Costsprice of changing pricesmight
    encourage producers to change prices less
    frequently but in bigger steps (soda machines)
  • Since there is a cost of printing new menus,
    changing pricing machines, etc.

16
2 Types of Inflation
  • Demand-Pullincrease in AD shifting the curve to
    the right raising prices
  • Cost-Pushdecrease in AS shifting the curve to
    the left raising prices
  • STAGFLATIONworst possible situation with
    decrease in output and increase in price (due to
    cost-push or SUPPLY SHOCKS)

17
Demand pull
18
Cost Push
19
ALL IN ALL
  • Chapter focusing on interaction of total demand
    (AD) and total supply (AS) to determine our
    HAPPY PLACE in the economy
  • Only one happy place and as we see in Chapter 12
    the govt takes steps to keep us there

20
Summary
  • AD, AS, real GDP, equilibrium, natural rate of
    unemployment, full employment level of output
  • By combining AS and AD with the full employment
    level of output we can determine where we are
    supposed to be in regards to GDPnow we just have
    to figure out how to get there
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Chapter 11: Aggregate Demand and Aggregate Supply

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Big difference in response between LONG RUN and SHORT RUN ... Only one happy place and as we see in Chapter 12 the gov't takes steps to keep us there ... – PowerPoint PPT presentation

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Transcript and Presenter's Notes

Title: Chapter 11: Aggregate Demand and Aggregate Supply


1
Chapter 11 Aggregate Demand and Aggregate Supply
  • Content and Visuals taken from McConnell/Brues
    Economics

2
Overview
  • 3 big ideas
  • Aggregate Demand
  • Aggregate Supply
  • Equilibrium

3
Aggregate Demand
  • Shows the amount of REAL outputs that buyers
    desire to purchase at each possible price level
  • Essentially shows how much all of us together buy
  • Like micro, always represented by a downward
    sloping linebuy why?

4
Explained
  • In MICRO, there are 3 reasons for downward
    slopewhat are they?
  • Income Effect, Substitution Effect, and Law of
    Diminishing Marginal Utility
  • In MACRO the 3 reasons are different
  • REAL-BALANCES EFFECT, INTEREST-RATE EFFECT,
    FOREIGN PURCHASES EFFECT

5
(No Transcript)
6
More EXPLAINED
  • Real-balances effecthigher prices mean we cannot
    buy as much so we are more likely to save
  • Interest-rate Effectat a lower rate we will
    borrow more, at higher rate borrow less,
    effecting how much we can buy overall
  • Foreign Purchases effectif our prices are
    higher, we are more likely to buy cheaper imports

7
(No Transcript)
8
Aggregate Supply
  • Amount of REAL domestic output that will be
    produced at each price level
  • Big difference in response between LONG RUN and
    SHORT RUN
  • In long run, everything can respond/change,
    including wages
  • In short run, only inputs can changewages
    sticky

9
Keynesian Curve
  • 3 distinct parts culminating at vertical
  • Input costs will most determine where curve
    is75 of costs from labor
  • PRODUCTIVITY and capital deepening WILL ALSO
    AFFECT CURVE
  • Govt can influence through taxes and subsidies

10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
Equilibrium
  • HAPPY price and output
  • Anything above this point will discourage
    spending (inflation) and reduce outputanything
    below will encourage spending and increase output

14
(No Transcript)
15
Few Additions
  • Deflationprices actually go down
  • Disinflationstill inflation but at a lower level
  • Efficiency Wageswage that produces best results
    in productivitydoesnt have to be lowest wage if
    produce more at higher pay (SHEETZ)
  • Menu Costsprice of changing pricesmight
    encourage producers to change prices less
    frequently but in bigger steps (soda machines)
  • Since there is a cost of printing new menus,
    changing pricing machines, etc.

16
2 Types of Inflation
  • Demand-Pullincrease in AD shifting the curve to
    the right raising prices
  • Cost-Pushdecrease in AS shifting the curve to
    the left raising prices
  • STAGFLATIONworst possible situation with
    decrease in output and increase in price (due to
    cost-push or SUPPLY SHOCKS)

17
Demand pull
18
Cost Push
19
ALL IN ALL
  • Chapter focusing on interaction of total demand
    (AD) and total supply (AS) to determine our
    HAPPY PLACE in the economy
  • Only one happy place and as we see in Chapter 12
    the govt takes steps to keep us there

20
Summary
  • AD, AS, real GDP, equilibrium, natural rate of
    unemployment, full employment level of output
  • By combining AS and AD with the full employment
    level of output we can determine where we are
    supposed to be in regards to GDPnow we just have
    to figure out how to get there
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