Aggregate Supply

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Aggregate Supply Aggregate Demand

• Chapter 11
• ECON 100

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AD-AS Model

• The AD-AS (Aggregate Demand-Aggregate Supply)
  Model seeks to explain a few things
• The movement of an economy throughout the course
  of the business cycle
• How inflation occurs
• How unemployment occurs
• Why and how economic growth occurs (economic
  growth increase in real GDP)

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Breaking Down the Model

• Aggregate Demand
• Refers to the total quantity of real GDP demanded
  at different price levels, holding everything
  else constant
• When we talk about price levels, we mean the
  different levels of inflation.
• Aggregate takes into account all the demand of
  all consumers for all goods and services offered
  in the economy.

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Aggregate Demand Curve

• The AD curve is downward-sloping. How come?
• Real balances effect cheaper prices make dollars
  more valuable.
• Foreign trade effect when American-made products
  are cheaper to the rest of the world, the world
  will demand more U.S. exports
• Interest rate effect at lower price levels,
  consumer borrowing needs are smaller. When that
  happens, interest rates fall, and borrowing money
  becomes cheaper.

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Aggregate Supply

• AS is the total quantity of output producers are
  willing and able to supply at alternative price
  levels in a given time period.

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Aggregate Supply

• Why exactly is the AS curve upward sloping?
• Costs In the short-run, costs (especially labor)
  remain fixed- businesses are not obligated to
  increase the workers wages, while inflation
  increases. In essence, workers wages remain
  unchanged.
• Profit-margins Since the cost of doing business
  will not change radically, profit-margins will
  increase as we move NorthEast along the Aggregate
  Supply curve.

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To Summarize

• DEMAND-SIDE
• Consumers

• SUPPLY-SIDE
• Producers

When AD AS, equilibrium GDP is produced and the
economy moves to the equilibrium price level!
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Macroeconomic Equilibrium

• Equilibrium GDP and equilibrium price-levels will
  occur only where
• AD AS
• Graphically, we can put things into much simpler
  terms

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Equilibrium GDP, Price Level
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A Mathematical Example
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Shifts in Agg. Demand Agg. Supply

• External shocks to the economy can radically
  alter macroeconomic equilibrium

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Increase in wealth ? increase in demand
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AD-AS Examples

• Now we can discuss a few examples that reflect
  real-world scenarios, in which we take into
  account both AD and AS.

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Consumers Incomes Increase
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The Government Cuts Taxes of All Individuals
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Personal Taxes Increase
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Oil-Based Businesses React to the Fall in Oil
Prices
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Business Tax Rates Increase by 5, Income Tax
Rates Increase by 10