Aggregate demand and aggregate supply and their interaction

Mind Map by , created over 6 years ago

economics (F582: The national and international economy) Mind Map on Aggregate demand and aggregate supply and their interaction, created by raid001 on 04/14/2013.

Created by raid001 over 6 years ago
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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
1.1 Consumption: spending by households on consumer products
1.1.1 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
1.2 Government Spending: spending of central govt on public goods and services
1.2.1 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
1.3 Investment: spending by businesses on capital goods and services
1.3.1 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
1.4 Net Exports: exports minus imports
1.4.1 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.
2 Multiplier effect:the process by which any change in a component of aggregate demand results in a greater final change in real GDP
2.1 when one persons's spending becomes another's. this results in AD rising more than the initial amnt
3 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
3.1 if spare capacity is high, lots of raw materials so unemployment level decreases
3.2 spare capacity decreases as its being used up-so few raw materials available. demand for extra workers decreases.
3.2.1 AS=becoming inelas as cost of production is rising, so price of goods/services has to rise in order to make profit
3.3 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.
3.4 Short run=period of time where atleast 1 factor of production is assumed to be in fixed supply(unchangeable) >is temporary.
3.5 Long run=period of time where all factors of production are variable >is permanent.
4 Circular flow of income: movement of spending and income in an economy/ money circulating arnd economy.
4.1 factors of production (land, labour, capital, enterprise) are things required to make products going from households-->firms
4.2 factor incomes (wages, rent, interest, profit) are returns received from fop going from firms back to households
4.3 leakages= when households income doesn't all flow back to firms as expenditures on govt spending. e.g. savings, imports, tax.
4.4 injections=when outsiders invest extra money into an economy to expand output

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