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Aggregate demand and aggregate supply and their interaction

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economics (F582: The national and international economy) Mind Map on Aggregate demand and aggregate supply and their interaction, created by raid001 on 14/04/2013.
raid001
Mind Map by raid001, updated more than 1 year ago
raid001
Created by raid001 almost 12 years ago
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Resource summary

Aggregate demand and aggregate supply and their interaction
  1. Aggregate Demand: the total demand for a country's goods and services at a given price level in a given time period
    1. Consumption: spending by households on consumer products
      1. influences
        1. real disposable income= avg propensity to consume:prop of disp income that is spent. as disp income increases, prop of disp income spent decreases
          1. wealth=if youre wealthy, the wealthier you are, more likely to spend meaning that you have higher consumer confidence
            1. interest rate=cost of borrowing(less likely to borrow if high payback), reward for saving, net savers(save>spend, high interest beneficial for them
              1. population structure=young and elderly tend to spend more of their disposable income
            2. Government Spending: spending of central govt on public goods and services
              1. influences
                1. economic activity=recession(increased gs to encourage spending), boom(wont spend), expansion(dont need to spend)
                  1. war terrorism/crime=increased spending to defend activity
                    1. level of govt intervention=corrects market failure; autocracy, laissezfaire, democracy
                      1. political agenda=campaign is more spending to look good
                    2. Investment: spending by businesses on capital goods and services
                      1. influences
                        1. 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
                          1. 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
                            1. capacity utilisation=extent to which businesses are using their capital goods. low=lots of spare capacity>low investment rate
                              1. taxes=income,VAT,corporation. cut in corporation tax increases amnt of profit firms can keep>increases investment
                                1. interest rate=if HIGH: increases opportunity cost of investment, more expensive to borrow,affect expected return,reduce demand for shares
                                  1. technology=invest to increase efficiency of production. to produce products more cheap/better quality
                                    1. capital equipment=reduction in price of equipment>increases investment
                                  2. Net Exports: exports minus imports
                                    1. influences
                                      1. disposable income=increased income>increased spending power>imports go up>net exports decrease>trade deficit>AD decreases
                                        1. exchange rate=rise in exchange rate will result in a fall in net exports (SPICED/WPIDEC)
                                          1. govt restrictions on free trade=country's net exports increase if other countries govt remove trade restrictions.
                                      2. Multiplier effect:the process by which any change in a component of aggregate demand results in a greater final change in real GDP
                                        1. when one persons's spending becomes another's. this results in AD rising more than the initial amnt
                                        2. 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
                                          1. if spare capacity is high, lots of raw materials so unemployment level decreases
                                            1. spare capacity decreases as its being used up-so few raw materials available. demand for extra workers decreases.
                                              1. AS=becoming inelas as cost of production is rising, so price of goods/services has to rise in order to make profit
                                              2. 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.
                                                1. Short run=period of time where atleast 1 factor of production is assumed to be in fixed supply(unchangeable) >is temporary.
                                                  1. Long run=period of time where all factors of production are variable >is permanent.
                                                  2. Circular flow of income: movement of spending and income in an economy/ money circulating arnd economy.
                                                    1. factors of production (land, labour, capital, enterprise) are things required to make products going from households-->firms
                                                      1. factor incomes (wages, rent, interest, profit) are returns received from fop going from firms back to households
                                                        1. leakages= when households income doesn't all flow back to firms as expenditures on govt spending. e.g. savings, imports, tax.
                                                          1. injections=when outsiders invest extra money into an economy to expand output
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