Economics 2.5.2 Flashcards
What is aggregate demand composed of
C + I + G + (X-M)
(consumption + investment + government spending + net exports (exports- imports) )
on a aggregate demand curve what is the price level
(Y axis)
The price level is the average of prices for all goods and services in an economy.
on an aggregate demand curve what does real national output mean
(x axis)
Real national output is the output of the economy taking into account inflation.
How is contraction shown on an aggregate demand diagram
A rise in the price level leads to a contraction in aggregate demand.
this moves upwards along the line
How is expansion shown on an aggregate demand diagram
A fall in the price level leads to an expansion in aggregate demand.
this moves downward along the line
What is the effect if any of the components of AD increase
An increase in any of the components of AD will lead to a shift from AD to AD1.
this is to the right (above previous line)
What is the effect if any of the components of AD decrease
A decrease in any of the components of AD will lead to a shift from AD to AD2.
This is to the left (below previous line)
What does a short run aggregate supply diagram look like
it is the opposite it slopes downwards from right to left
What does expansion along the SRAS curve look like
A rise in the price level leads to an expansion in short-run aggregate supply .
What does a fall in price cause for aggregate demand
A fall in the price level leads to a contraction in short-run aggregate supply.
What does an increase in production cost do to the line
An increase in costs of production will lead to a shift from SRAS to SRAS2.
which is to the left (above)
What does a decrease in production costs cause
A decrease in costs of production will lead to a shift from SRAS to SRAS1.
which is to the right (below)
Short run aggregate demand shifts when does this happen
Changes in costs of raw materials and energy
Higher raw material prices e.g. oil and metals increase the firm’s costs of production and will reduce SRAS
This will lead to a shift in the supply curve to the left
This impacts on both price and quantity supplied as a reduction in firms’ output means an increase in price
Long-run aggregate supply can shift when does this happen
Long-run aggregate supply can shift when there is a change in the quantity and/or quality of the factors of production
Technological advances
These can reduce the cost of production and help to increase productivity
This leads to an increase in supply as firms already in the industry can increase production to earn higher profits
Other firms might enter the industry as the new technology has made it easier and cheaper to produce goods and services, thus allowing them to be profitable
When does long run aggregate supply shift
If there is an increase in the quality of the labour force productivity is enhanced and LRAS will increase
This could take place through training and education of the workforce
This should lead to an increase in efficiency and skills
A higher skilled workforce is better able to innovate and continually improve production processes
This will help shift LRAS to the right
hanges in relative productivity
The UK lags behind its competitors when it comes to productivity
This could be for a number of reasons such as a lack of investment in quality capital equipment, poor education and training or poor management of the factors of production
Sometimes countries are more productive due to an abundance of natural resources
By investing in all of the factors of production changes in relative productivity can be made
What is the simple circular flow of income
1) Firms provide households with goods and services
2) Households spend their income on the goods and services produced by firms
3) Households also provide firms with factors of production:
Land, Labour, Capital & Entrepreneurship
4) In order to pay for these factor services, firms pay households rent, wages, interest and profit
How do we make a more realisic model
To do this we consider INJECTIONS into and WITHDRAWALS from the circular flow
injection
Government Expenditure
Investment
Exports
what are withdrawals
Savings
Taxes
Imports
