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Юриспунденкция

The balance of aggregate demand and aggregate supply.

TOPIC 4

Lecture 4.1

"Aggregate demand and aggregate supply"

Plan

Aggregate demand and factors affecting it. Curve AD.

Aggregate supply and the factors that affect it. Curve AS.

The balance of aggregate demand and aggregate supply.

1) Aggregate demand - scale that looks graphically as a curve that shows the value of the real volume of purchases of products in different quantities of goods and services that buyers are willing and able to buy at different price levels. Aggregate demand is the sum of internal and external demand for domestic goods and services.

AD = (C + I + G)_вн + Exp_зовн(4.1)

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Figure. 4.1 Aggregate demand

The movement of AD curve affected by several non-price factors, and movement through curve is provided by price factors. Price factors include:

- The effect of money supply in the economy;

- The effect of interest rates (Keynes effect);

- The effect of import purchases.

Non-price factors include:

- Political and economic factors - aggregate demand depends a lot on government policies;

- External factors - the demand for domestic goods and services largely depends on the level of export-import relations, location of key resources;

- Consumer expectations - sometimes in anticipation of increasing in prices, consumers buy a certain type of mass production, which leads to a rapid increase in demand.

To understand the dynamics and structure of domestic production of the country, you first need to track and understand the causes of changes in aggregate demand. To investigate the influence of one or more factors that affect the change in aggregate demand of the country.

1) Aggregate supply - the scale of which is represented graphically as a curve shows the the relationship of the volume of real national product, which will be produced for each possible price level. The national economy might react to changes in aggregate demand increasing or decreasing national product.

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Type of relationship between prices and volume of domestic product depends on the analyzed period. Most economists have the same view that the aggregate supply curve in the long run is a vertical line. This is a result of the principle of the classical dichotomy (a rule that says real variables do not depend on nominal variables.

Figure. 4.2 Graph of aggregate supply in the long run.

The curve AS l shows domestic production, which is called the natural rate of production subject to full employment. Therefore, all the factors that affect the natural rate of production can move it left or right. Such factors include:

- Events of government economic policy that will change the volume of supply through the use of additional economic incentives for production, or creating additional obstacles (introduction of additional taxes, subsidies or grants);

- Government events affecting the natural rate of unemployment (change in the minimum wage, a change of unemployment benefit).

In the short run AS curve slopes upwards, due to changes in unit costs. This form of the curve is explained differently. Economists who believe that the economy is cyclical, explain the shape of the curve AS three segments.

Graph of AS in the short term.

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Figure. 4.3 Graph of aggregate supply in the short run

- Part of economists identifies the following segments:

- 1 - Keynesian - reflects a situation where the economy is in a phase of decline and a significant part of production capacity and labor are not involved in the production. Attracting new resources to produce more products is not costly and does not increase much unit cost. Thus the growth rate of national product significantly greater than the growth rate of consumption.

- 2 - Ascending period - characterized by the fact that a further increase in national production requires a much higher cost and this leads to higher prices in the economy. There may be a situation when the use of additional resources and skilled workers may lack in some areas and be free in other areas. To attract them, you have to pay more as a result of the price increase is.

- 3 - Classical period - characterized by the absence of cyclical unemployment, real GDP growth further slows down and reaches a level of natural output. Further GDP growth is possible only if the movement of labor and production resources from one industry to another.

There is also the point of view of some economists that the economy of any country is not developing the expected manner and provide separate cycles and phases of development impossible. These economists explain the shape of the aggregate supply curve in the short run four theories:

- ASs curve has such increasing shape due to the rigidity nominal wages index. In most areas, this figure is fixed by collective agreements for a period of one to three years. Thus, as wages is one of the key elements of production costs, respectively, the total cost of production is gradually changing as a result gradually changing for domestic production (GDPR);

- Index of real wages is quite inaccurate for many employees. Some of them afraid of losing jobs, thus do not require an increase in wages, while others require more pay without having reasonable grounds for this. Thus, manufacturers often use employee misconceptions about the appropriate level of remuneration;

- Most manufacturers in many industries monitor the prices of raw materials for own production and prices for key competitors, not tracking the change in the general price level in the economy and industries. Accordingly, they gradually change product prices for fear of losing loyal customers;

- Prices in the economy is gradually changing as major producers fix prices for their products in long term contracts and, accordingly, the performance of such contracts can last from one to three years, which restrains price changes in the economy and increasing domestic production (GDPR).

Thus, according to this view of economists gradual growth curve ASs is the result of one or more of the above theories.

There is also a view of a small number of economists who believe that the economy, although growing cyclically, but cycles are the result of random factors and consequently in a separate loop impossible to distinguish individual phases. In this perspective, ASs shape of the curve is rapidly growing, with no individual segments on it.

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ВВПр

Figure. 4.4 Graph of curve ASs under this point of view

On ASs curve and the corresponding aggregate supply in the country affects a number of factors that lead to movement along the curve (price factors) and moving curve to the left (decrease aggregate supply) or right (increase aggregate supply) (non-price factors).

The main price factors are:

- Structural changes and natural changes (non-simultaneous achievement of full employment in certain sectors, opening expensive natural resources);

- Institutional factors (economic sanctions or the submission of grant);

- External factors (quotas for the export / import duties, non-direct taxes);

- Factors that begins when the economy reaches the natural rate of output.

Non-price factors includes factors that increase or reduce unit costs, regardless of changes in output. They are divided into:

- Nominal affect ASs only in the short term:

- The level of of prices for resources;

- The structure of market of goods and services, their level of monopolization

- Indirect taxes and their size;

- The expected change in the price level in the economy.

- Real - are both in the short term and in the long term:

- Resources that are used and the effect from them;

- Integration in the manufacturing country in the world economy participation in the international division of labor;

- Spending of capital to expand the business.

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