3.1 Intro to AD AS

Question 1

What is the main difference between micro and macro?

Answer 1

Micro is to do with the supply and demand of individual goods. Macro is to do with the supply and demand of the average of all the goods in the UK economy.

Question 2

How do we label the D/S curves in macro? Why?

Answer 2

In Macro the D/S curves are labelled as Aggregate Demand (AD) and Aggregate Supply (AS).

Question 3

Why does the AD curve slope downwards?

Answer 3

The AD curve slopes downwards because as the price decreases, the demand increases (demand is on x-axis).

Question 4

Why does the AS curve slope upwards?

Answer 4

The AS curve slopes upwards because as the price increases, the amount of supply increases as well.

Question 5

What does the AD curve show?

Answer 5

The Aggregate Demand curve shows the total planned expenditure on goods and services made in the UK (but not necessarily consumed in the UK).

Question 6

What does the AS curve show?

Answer 6

The Aggregate Supply curve shows the total planned production of goods and services made in the UK.

Question 7

Why is the y axis PL rather than P?

Answer 7

PL stands for price level which is the general level of prices in the whole economy. If this rises, there is inflation. If this falls, there is deflation.

Question 8

What is RNO?

Answer 8

RNO stands for Real National Output which is the total volume of goods and services actually produced in the UK and consumed (anywhere).

Question 9

What ONE thing decides the location of the AS curve? If this increases/decreases, what happens to the curve?

Answer 9

The cost of production determines the location of the AS curve. If this increases, the AS curve shifts left, and if it decreases, the AS curve shifts right.

Question 10

What are the costs of production?

Answer 10

Raw materials, labor, capital, energy, transportation, marketing and advertising, research and development, taxes, and insurance.

Question 11

Why is the AS curve often drawn as straight?

Answer 11

The AS curve is often drawn as straight for simplicity and to make it easier to analyze the relationship between price and quantity.

Question 12

What makes up aggregate demand?

Answer 12

Aggregate demand is made up of consumption, investment, government spending, and net exports.

Question 13

What happens to the AD curve if any of the components of aggregate demand change?

Answer 13

If any of the components of aggregate demand change, it will cause a shift in the AD curve.

Question 14

What percentage of aggregate demand is consumption?

Answer 14

Consumption makes up around 70% of aggregate demand.

Question 15

What is consumption made up of?

Answer 15

Consumption is made up of the goods and services purchased by individuals.

Question 16

What factors impact how much a consumer consumes?

Answer 16

Income, wealth, inflation, interest rates, and credit availability impact how much a consumer consumes.

Question 17

What is an economist’s definition of disposable income?

Answer 17

An economist’s definition of disposable income is the amount of income available to individuals after paying taxes.

Question 18

What is the APC? MPC?

Answer 18

The APC is the average proportion of income spent on consumption, and the MPC is the marginal proportion of income spent on consumption.

Question 19

How does the MPC differ between low and high income earners?

Answer 19

The MPC tends to be lower for high-income earners compared to low-income earners.

Question 20

What is the link between rising levels of wealth and consumption?

Answer 20

Rising levels of wealth, such as increasing house prices, can increase consumer confidence and lead to higher consumption.