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Aggregate Demand/Supply Model & Its Effect on Price Level and Output or Real GDP July 6, 2009

Posted by petrarcanomics in Markets: Supply & Demand, Role of Government.
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The aggregate demand aggregate supply model has price level on its vertical axis and output or real GDP on its horizontal axis.

Aggregate Demand

Aggregate demand is made up of consumption, investment, government spending, and net exports. It is negative sloping due to the interest rate effect, the real balances effect, and the foreign purchases effect. Aggregate demand shows the relationship between the average price level for all goods and services and the quantity of all goods and service people are willing to buy.

Short-run Aggregate Supply

Short-run aggregate supply is the total amount of goods and services that businesses are willing to produce over a range of price levels.

Long-run Aggregate Supply

Long-run aggregate supply is the amount of goods and services that can be produced when the economy is using all of its resources.

Price Level

Price level is an overall measure of prices on goods and services throughout the economy.

Output

Output or real GDP is the quantity of overall goods and services that are being produced in the economy.

True Growth

True growth in the economy is depicted as a rightward shift in the long-run aggregate supply curve. Another way true growth can be depicted is an outward shift of the production possibilities curve (PPC). True growth in our economy can be achieved by increased productivity, newer or improved technologies, increases in resources, or increased education and training of workers or labor.

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The Effects of Price Elasticity of Demand September 23, 2008

Posted by petrarcanomics in Markets: Supply & Demand, More Markets & Elasticity.
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Elasticity has profound real-world effects on the way businesses price their products. Price and quantity of demand have an inverse relationship.

If a product is price inelastic, it means that a change in price will cause a smaller relative change in quantity, meaning that an increase in price will dominate the decrease in quantity causing a price increase to lead to a total revenue increase. A decrease in price will dominate the increase in quantity causing a price decrease to lead to a total revenue decrease.

If a product is price elastic, it means that a change in price will cause a larger relative change in quantity, meaning that an increase in price will be dominated by the decrease in quantity causing a price increase to lead to a total revenue decrease. A decrease in price will be dominated a larger quantity increase causing a price decrease to lead to a total revenue increase.

If a price is unit elastic to its demand, then a price increase or decrease will cause no change in total revenue because the change in price will be equally balanced with a commensurate change in quantity.

For more on elasticity of demand, see Reffonomics.

The Effects of Supply and Demand September 23, 2008

Posted by petrarcanomics in Markets: Supply & Demand, More Markets & Elasticity.
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A demand increase will cause a shift to the right in the demand curve, causing both price and quantity to increase. A demand decrease will cause a shift to the left in the demand curve, causing both price and quantity to decrease.

A supply increase will cause a shift to the right in the supply curve, causing price to decrease and quantity to increase. A supply decrease will cause a shift to the left in the supply curve, causing price to increase and quantity to decrease.

Determinants of Supply and Demand August 26, 2008

Posted by petrarcanomics in Markets: Supply & Demand, Videos.
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The following determinants cause shifts in the entire demand curve:

  • change in consumer tastes
  • change in the number of buyers
  • change in consumer incomes
  • change in the prices of complementary and substitute goods
  • change in consumer expectations

The following determinants cause shifts in the entire supply curve:

  • change in input prices
  • change in technology
  • change in taxes and subsidies
  • change in the prices of other goods
  • change in producer expectations
  • change in the number of suppliers
  • Any factor that increases the cost of production decreases supply.
  • Any factor that decreases the cost of production increases supply.

The following videos explain this concept further:

Markets (Unit 2) August 26, 2008

Posted by petrarcanomics in Markets: Supply & Demand.
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This unit will explain how markets function using supply and demand analysis.

Demand

A typical demand curve will be negative sloping as exhibited in this demand schedule for milk.

Price Quantity Demanded
$2.80 500
$2.90 450
$3.00 400
$3.10 350
$3.20 300

As you can see, as the price of milk increases, quite logically, the quantity demanded of milk by consumers of will decrease causing there to be an inverse relationship between the price and quantity demanded. This applies to all consumer products.

Quantity demanded points strung together at various prices make up the demand curve.

A current change in the price of the good itself will only cause changes in quantity demanded along the curve but will not cause any shifts in the demand curve as a whole.

For a more thorough explanation visit Reffonomics.

Supply

A typical supply curve will be positive sloping as exhibited in this supply schedule for milk.

Price Quantity Supplied
$2.80 300
$2.90 350
$3.00 400
$3.10 450
$3.20 500

As you can see, as the price of milk increases, quite logically, the quantity supplied by producers of milk will increase causing there to be an positive relationship between the price and quantity demanded. This applies to all products. Naturally producers are going to want to supply more of a certain product, such as milk, at a higher price because this will increase total revenue and profit.

Quantity supplied points strung together at different prices make up the supply curve.

A current change in the price of the good itself will only cause changes in quantity supplied along the curve but will not cause any shifts in the supply curve as a whole.

For a more thorough explanation visit Reffonomics.