ECONOMICS FOR BUSINESS AD & AS ANALYSIS MACRO ECONOMIC - - PowerPoint PPT Presentation

ECONOMICS FOR BUSINESS

• AD & AS ANALYSIS
• MACRO ECONOMIC OBJECTIVES

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AD= C + I + G + (X – M)

AGGREGATE DEMAND

Aggregate or total demand is the sum of planned consumption (C), investment (I), government expenditures (G), and net exports (x- m) within one economy.

THE AGGREGATE DEMAND CURVE

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• x axis shows the value of output in real GDP
• The y axis shows the price level

CHANGES IN AGGREGATE DEMAND

A change in any factor other than the price level will shift AD

• Some factors that may influence buying plans other than

the price level are :

• Fiscal policy and monetary policy
• Changes in the world economy
• Expectations

CHANGES IN AGGREGATE DEMAND

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AD0 AD1 AD2

Increase in aggregate demand Decrease in aggregate demand

Real GDP

Price level

THE AGGREGATE SUPPLY CURVE

The as curve shows the quantity of real GDP (total output) supplied at different price levels.

• It is upward-sloping because firms will be induced to bring more products to the

market if the price level rises. A/supply (output) depends upon inputs: examples:

• The quantity and price of labour
• The quantity and price of capital
• The state of technology
• Productivity of factors

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SHIFTS IN AGGREGATE SUPPLY

• A/supply will increase if :
• Wage levels fall
• Raw material prices fall
• There are improvements in technology or productivity
• A/supply will decrease if :
• Wage levels rise
• Raw material prices rise
• Productivity declines
• E.G. A rise in the money wage rate or oil prices

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THE KEYNESIAN VIEW OF AS

Keynes argued that prices and wages are inflexible, so ad would create increased output with little change in price level

• Therefore the as curve is horizontal.

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THE CLASSICAL VIEW OF AS

• This theory states that wages & prices are flexible and automatically adjust the

economy.

• When ad falls, inventories grow, but are eliminated as firms lower their prices.

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AGGREGATE SUPPLY Full Employment

• As the economy approaches the level of full employment, resources become scarce.

The capacity to grow decreases while resources prices rise.

• These effects cause as to become steeper and inelastic towards the full

employment level of income

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3 RANGES OF AGGREGATE SUPPLY

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• The keynesian view is more

likely to hold in recession.

• The classical view is more

likely to hold at full employment output.

• Between these two ranges is

the intermediate range when the as curve rises as the economy approaches full employment.

MACRO ECONOMIC EQUILIBRIUM

• Occurs when the quantity of real GDP demanded equals the quantity of real

GDP supplied

• Where the AD and AS curves intersect.
• At this point, sellers neither overestimate nor underestimate the real GDP

demanded at a particular price.

• Any difference between AD and AS will bring about a change in firms’ stock,

and also cause firms to adjust their plans for the future.

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MACROECONOMIC EQUILIBRIUM

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MARCO ECONOMIC OBJECTIVES

• Economic growth should be high and stable
• Inflation should be low but not zero
• Balance of payments
• Low unemployment
• Equal distribution of income
• Environmental protection & conservation

OBJECTIVE 1- ECONOMIC GROWTH

• Growth is measured using GDP/GNP statistics. It is a measurement of the

national income.

• Ideally an economy should have a sustainable rate of GDP growth.
• If the growth rate is too low the income of the country is rising too slow and if

the rate is too high it could indicate over consumption of limited resources.

• Underdeveloped economies should target rapid growth rates while developed

countries should look at a lower or stable/sustainable growth rate.

OBJECTIVE 2- LOW INFLATION

• Inflation is the general rise in average price levels in the economy.
• Inflation reduces the value of money and causes many issues such as reducing the

amount of goods and services that can be consumed by the disposable income etc.

• A negative inflation rate or deflation is also undesirable since it delays purchases.

This is bad for businesses.

• Hyperinflation is a rapid increase in price levels that devalue currencies causing people

to minimize holdings in that currency.

OBJECTIVE 3-BALANCE OF PAYMENTS

• BOP of a country is a record of all economic transactions its citizens have with

the rest of the world.

• BOP is made up of the capital account & the current account.
• A large sustained deficit is undesirable because it can lead to a credit crunch.
• A large surplus is also undesirable because it indicates over production and

consumption or scares resources.

OBJECTIVE4 – LOW UNEMPLOYMENT

• Unemployment rate can be defined as the number of people who are able to work,

willing to work & actively looking for work, but unable to find a job at the current market wage rate.

• High unemployment can create negative impacts including slow gdp growth, increase

in govt. Welfare benefits, increase in crime etc.

• Its impossible to have full employment since frictional unemployment will

always exist.

• The government must strive to minimize structural unemployment which

is far more serious.

OBJECTIVE 5 – EQUAL DISTRIBUTION OF INCOME

• Distribution of income looks at the gap between the rich and poor. Great

the gap the bigger the inequality.

• Lorenz curve helps us understand income distribution disparity
• If the gap is too wide the low income earners will not be able to afford

basic necessities.

• Govt. Should strive to eradicate absolute poverty & relative poverty.

OBJECTIVE 6 – ENVIRONMENTAL PROTECTION

• This objectives looks at the use of national resources

and the process of conservation.

• If scares resources are over consumed we run the risk of

them running out too fast. It also looks at conservation for future generations

• E.G. Crude oil, fish, timber, water etc.

CONFLICTING OBJECTIVES

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Thank You!