Econ Class 11

Aggregate Demand and Supply

This is not assessed!!!!!!!!! HOWEVER, using it is good in the assessment, but will not be marked down for not using it. Don't lose marks for getting it wrong.

• What is aggregate demand?
  • Total demand in an economy
    • If you demand something, it doesn't mean you can get it.
    • Who demands? Households through consumption, firms through investment, government through government spending, and export sector. (Net exports = exports - imports)
  • Total output in an economy.
  • What happens when aggregate demand is greater or lower than aggregate supply?
  • Components of aggregate demand:
    • Consumption Expenditure - Consumption
      • Spending by consumers - every person in economy, including firms, government, etc.
      • Durable goods, e.g. houses
      • Non-durable goods, lasts 3 years or less e.g. perishable food
      • Services, e.g. education
      • 60% of aggregate demand.
    • Investment Expenditure
      • Spending on capital, e.g. machinery, factories and anything that can produce thing, which will produce goods and services in the future.
      • Refers to business and housing investment or inventories
    • Government Expenditure
      • G1: current (consumption) expenditure which are part of the day to day functions of government.
        • This refers to the set budget for the upkeep of the services/goods it provides.
        • e.g. There is a daily payment to the school for it to continue its servicing of education.
        • This usually cannot be changed.
      • G2: capital (investment) expenditure to provide for future needs such as schools, roads, etc.
        • Government invests money into improving existing goods/services or providing new things.

Fiscal policy is when government changes G2 to boost or lower economic activity. G1 is essentially constant.

Aggregate Demand curve: how to change it

• Taxation - income changes, changing consumption
• Interest Rates
• Changes in supply
• Deregulation?
• Government spending
• Immigration
• Trade policy
• Wage changes
• Everything here is something to do with consumption, investment or government.
• This is because anything that changes these things change aggregate demand
• To move the curve, we must change these factors.

What is aggregate supply?

• The total amount of goods and services produced in an economy at a given price level over a given period of time. It is essentially the sum of all the supply curves of individual producers

• This is exactly the same as GDP, as GDP measures value of output, which is essentially the same

• We strive to be at equilibrium, where aggregate supply = aggregate demand

  • It's not bad or good, its simply when the 2 things are equal.
  • You can have equilibrium in both depression and boom.

• An economy will never be at equilibrium, as there are too many everchanging factors.

• However, our economy is trying to be at equilibrium.

• Currently, aggregate demand is exceeding aggregate supply.

  • This means the producers cannot produce everything that people want.
  • This causes the price of the products to increase.
  • As the price level rises, demand will decrease as people cannot afford it. This is called the income effect.
  • Eventually, through price levels, we reach a point of "equilibrium" in a sense where aggregate demand reduces to the point where it meets aggregate supply.
  • The opposite applies, when we increase supply of a goods to match aggregate demand, prices will fall as we reach a point where aggregate demand reach a point.
  • TLDR; Markets always move towards equilibrium, but will never get there due to imbalance between aggregate demand and supply.

• Aggregate Supply curve is the relationship between aggregate supply and the general price level.

• Aggregate supply is total amount of goods/services produced, but does that mean the economy is at full capacity?

• No! This is why the aggregate supply curve exists, the change in aggregate supply represents capacity utilization.

Note: when supply curve moves to left, this is called a supply shock.

• Increasing capacity translates curve to right, decreasing capacity translate curve to left.

==Fiscal policy is demand-side!!!==

Aggregate supply can increase, but it does so if:

• Labour or capital increases
• New technologies are adopted
• Productivity increases
• Price for key natural resources falls => This is a massive issue, and usually causes supply shocks.
• Wage expectations fall
  • It will shift left if a supply shock occurs.

Fiscal policy's purpose is to maintain stability in an economy via impacting economic activity, and to meet the government objectives.

Fiscal Policy (finally)

The purpose of fiscal policy is to affect the level of economic activity, and meet the government's economic projections/objectives.

• It also aims to affect resource allocation and income distribution.

Budget: statement of expected revenue and expected expenditure over the financial year.

When budget is written, the parts for G1 things are pretty accurate, as they have good enough data on the things already. However, things like unemployment benefits are usually inaccurate, as this could be changed by changes in the economy.

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