46390
Aggregate demand and
aggregate supply and
their interaction
- Aggregate Demand: the total
demand for a country's goods and
services at a given price level in a
given time period
- Consumption: spending by
households on consumer products
- influences
- real disposable income= avg
propensity to consume:prop of
disp income that is spent. as
disp income increases, prop of
disp income spent decreases
- wealth=if youre
wealthy, the
wealthier you
are, more likely
to spend
meaning that
you have higher
consumer
confidence
- interest rate=cost of
borrowing(less likely to
borrow if high payback),
reward for saving, net
savers(save>spend, high
interest beneficial for them
- population
structure=young
and elderly tend to
spend more of
their disposable
income
- real disposable income= avg
propensity to consume:prop of
disp income that is spent. as
disp income increases, prop of
disp income spent decreases
- influences
- Government
Spending:
spending of
central govt on
public goods and
services
- influences
- economic
activity=recession(increased gs
to encourage spending),
boom(wont spend),
expansion(dont need to spend)
- war
terrorism/crime=increased
spending to defend activity
- level of govt
intervention=corrects
market failure;
autocracy,
laissezfaire,
democracy
- political agenda=campaign
is more spending to look
good
- economic
activity=recession(increased gs
to encourage spending),
boom(wont spend),
expansion(dont need to spend)
- influences
- Investment:
spending by
businesses on
capital goods and
services
- influences
- real disposable income=too
high=sign to businesses to
invest more on capital goods.
but=if sustainable
demand,people save
instead,if firms have spare
- business
confidence=businesses
would want to invest during
expansion and recovery.
cant invest at peak and
trough as you dont know
when youve hit it
- capacity
utilisation=extent to
which businesses are
using their capital
goods. low=lots of
spare capacity>low
investment rate
- taxes=income,VAT,corporation. cut
in corporation tax increases amnt of
profit firms can keep>increases
investment
- interest rate=if HIGH: increases opportunity cost of
investment, more expensive to borrow,affect
expected return,reduce demand for shares
- technology=invest to increase
efficiency of production. to produce
products more cheap/better quality
- capital
equipment=reduction in
price of
equipment>increases
investment
- real disposable income=too
high=sign to businesses to
invest more on capital goods.
but=if sustainable
demand,people save
instead,if firms have spare
- influences
- Net Exports: exports minus imports
- influences
- disposable
income=increased
income>increased
spending power>imports go
up>net exports
decrease>trade deficit>AD
decreases
- exchange rate=rise in
exchange rate will result
in a fall in net exports
(SPICED/WPIDEC)
- govt restrictions on free
trade=country's net exports increase
if other countries govt remove trade
restrictions.
- disposable
income=increased
income>increased
spending power>imports go
up>net exports
decrease>trade deficit>AD
decreases
- influences
- Consumption: spending by
households on consumer products
- Multiplier effect:the process
by which any change in a
component of aggregate
demand results in a greater
final change in real GDP
- when one persons's
spending becomes another's.
this results in AD rising more
than the initial amnt
- when one persons's
spending becomes another's.
this results in AD rising more
than the initial amnt
- Aggregate Supply: total amount of goods and
services that producers are willing and able to
supply at a given price level in a given time
period
- if spare capacity is
high, lots of raw
materials so
unemployment level
decreases
- spare capacity decreases as its
being used up-so few raw materials
available. demand for extra workers
decreases.
- AS=becoming inelas as cost of
production is rising, so price of
goods/services has to rise in order to
make profit
- AS=becoming inelas as cost of
production is rising, so price of
goods/services has to rise in order to
make profit
- spare capacity is low as
well as raw
materials>demand for extra
workers decreases and
AS=inelast. cost of prof
still increase despite no
supply.
- Short run=period of
time where atleast 1
factor of production is
assumed to be in
fixed
supply(unchangeable)
>is temporary.
- Long
run=period of
time where
all factors of
production
are variable
>is
permanent.
- if spare capacity is
high, lots of raw
materials so
unemployment level
decreases
- Circular flow of income: movement of spending
and income in an economy/ money circulating
arnd economy.
- factors of production
(land, labour, capital,
enterprise) are things
required to make
products going from
households-->firms
- factor incomes
(wages, rent,
interest, profit)
are returns
received from
fop going from
firms back to
households
- leakages= when
households income
doesn't all flow back to
firms as expenditures
on govt spending. e.g.
savings, imports, tax.
- injections=when
outsiders invest
extra money into
an economy to
expand output
- factors of production
(land, labour, capital,
enterprise) are things
required to make
products going from
households-->firms
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