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Aggregate Supply

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Aggregate Supply & Aggregate Demand Chapter 11 ECON 100 AD-AS Model The AD-AS (Aggregate Demand-Aggregate Supply) Model seeks to explain a few things: The movement of ... – PowerPoint PPT presentation

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Title: Aggregate Supply


1
Aggregate Supply Aggregate Demand
  • Chapter 11
  • ECON 100

2
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)

3
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.

4
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5
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.

6
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7
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.

8
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9
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.

10
To Summarize
  • DEMAND-SIDE
  • Consumers
  • SUPPLY-SIDE
  • Producers

When AD AS, equilibrium GDP is produced and the
economy moves to the equilibrium price level!
11
Macroeconomic Equilibrium
  • Equilibrium GDP and equilibrium price-levels will
    occur only where
  • AD AS
  • Graphically, we can put things into much simpler
    terms

12
Equilibrium GDP, Price Level
13
A Mathematical Example
14
Shifts in Agg. Demand Agg. Supply
  • External shocks to the economy can radically
    alter macroeconomic equilibrium

15
Increase in wealth ? increase in demand
16
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.

17
Consumers Incomes Increase
18
The Government Cuts Taxes of All Individuals
19
Personal Taxes Increase
20
Oil-Based Businesses React to the Fall in Oil
Prices
21
Business Tax Rates Increase by 5, Income Tax
Rates Increase by 10
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