3.1 Intro to AD AS Flashcards
What is the main difference between micro and macro?
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.
How do we label the D/S curves in macro? Why?
In Macro the D/S curves are labelled as Aggregate Demand (AD) and Aggregate Supply (AS).
Why does the AD curve slope downwards?
The AD curve slopes downwards because as the price decreases, the demand increases (demand is on x-axis).
Why does the AS curve slope upwards?
The AS curve slopes upwards because as the price increases, the amount of supply increases as well.
What does the AD curve show?
The Aggregate Demand curve shows the total planned expenditure on goods and services made in the UK (but not necessarily consumed in the UK).
What does the AS curve show?
The Aggregate Supply curve shows the total planned production of goods and services made in the UK.
Why is the y axis PL rather than P?
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.
What is RNO?
RNO stands for Real National Output which is the total volume of goods and services actually produced in the UK and consumed (anywhere).
What ONE thing decides the location of the AS curve? If this increases/decreases, what happens to the curve?
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.
What are the costs of production?
Raw materials, labor, capital, energy, transportation, marketing and advertising, research and development, taxes, and insurance.
Why is the AS curve often drawn as straight?
The AS curve is often drawn as straight for simplicity and to make it easier to analyze the relationship between price and quantity.
What makes up aggregate demand?
Aggregate demand is made up of consumption, investment, government spending, and net exports.
What happens to the AD curve if any of the components of aggregate demand change?
If any of the components of aggregate demand change, it will cause a shift in the AD curve.
What percentage of aggregate demand is consumption?
Consumption makes up around 70% of aggregate demand.
What is consumption made up of?
Consumption is made up of the goods and services purchased by individuals.
What factors impact how much a consumer consumes?
Income, wealth, inflation, interest rates, and credit availability impact how much a consumer consumes.
What is an economist’s definition of disposable income?
An economist’s definition of disposable income is the amount of income available to individuals after paying taxes.
What is the APC? MPC?
The APC is the average proportion of income spent on consumption, and the MPC is the marginal proportion of income spent on consumption.
How does the MPC differ between low and high income earners?
The MPC tends to be lower for high-income earners compared to low-income earners.
What is the link between rising levels of wealth and consumption?
Rising levels of wealth, such as increasing house prices, can increase consumer confidence and lead to higher consumption.
