Basic economics

1. Aggregate Demand and
Supply

2. Objectives:
• Differentiate GDP and GNP.
• Discuss the differentiate AD and AS.
• Identify the determinants of AD and AS.
• Give examples situation that AD and AS
can be applied.

3. Let’s Exercise Our Mind
First

4. • Using an AS/AD model, graph an
economy that is currently in a
recession.
• During a recession, consumer
spending is relatively low and fewer
people have jobs. Lower consumer
spending means lower GDP and an
aggregate demand curve smaller
than normal. Therefore, aggregate
demand is to the left of its normal
position.

5. • Suppose the economy of the United
State is at full employment. If
Americans begin purchasing more
foreign cars, what will happen to the
price level in America?
• The price level will decrease. An
increase in the amount of foreign cars
purchased means more imports in
America. This decreases America’s
net exports, lowering the GDP of
America. With a lower GDP, the
aggregated demand curve shifts to
the left and creates a new equilibrium
point at a lower price level.

6. • The economy of Japan is currently at full
employment. If income taxes increase in
Japan, what will happen to the
unemployment level in Japan?
• The unemployment level will increase. With
higher income taxes, workers receive less
income in each paycheck. Consequently,
workers aren’t able to spend as much
money as they once could. This will lead to
a decrease in Japan’s consumption and
investment, decreasing Japan’s GDP. The
decrease in GDP will shift the AD curve to
the left. A new equilibrium point will be
established at a lower economic output
level and lower employment rate. If the
employment rate decreases, the
unemployment rate increases.

7. • Suppose Austria is currently
operating at maximum capacity. If
the size of the labor force in Austria
increases, what will happen to the
price level in Austria?
• The price level in Austria will
decrease. With an increase in the
labor force, the LRAS and SRAS
curves will shift to the right as
business production increases. The
shifts will create a new equilibrium
point at a lower price level.

8. • The economy of China is currently
at full employment. If the price of
plastic in China decreases, what
will happen to the SRAS Curve?
• The SRAS curve will shift to the
right. With the decrease in the
price of plastic, business costs for
many Chinese factories decrease.
The decrease in business costs
will lead to higher supply, and an
increase in the SRAS curve.

9. GNP
• VALUE refers to the measurement in
money terms or Philippine pesos.
• FINAL GOODS are those that do not need
further production. They are the end point
of a particular production.

10. GDP
• Gross Domestic Product
Gawa Dito sa Pilipinas
• Measures the value of output produced in
the country regardless of whether the
factor of production used belongs to a
Filipino national or a foreigner.
• GNP= GDP + NET FACTOR INCOME
FROM ABROAD

11. Aggregate Demand
• The sum of all expenditure in the economy over
a period of time.
• The aggregate demand curve of an economy is
simply the GDP of that economy.
• When the economic output increases in a
country, the price level within that country
decreases.

12. Determinants of
Aggregate Demand
• Gross Domestic Product – When the GDP of an economy
increases, the AD curve shifts to the right and vice versa.
• Savings – An increase in savings leads to a decrease in
consumption and investment and causes the AD curve to shift to the
left.
• Interest rates –changes in interest rates directly affect the
investment of an economy. When the interest rates in an economy
decrease, more consumers, firms, and businesses take out loans to
buy big things. This leads to an increase in investment and an
overall increase in the economy’s GDP. Thus, when interest rates
decrease in an economy, the aggregate demand curve shifts to the
right.

13. • Consumer confidence – When consumers lose faith in their
economy, they often choose to save more money or spend it in
other markets. This leads to a decrease in consumption in the
domestic market and a consequential decrease in GDP. The
aggregate demand curve thus shifts to the left.

14. Aggregate Supply
• This is the amount of real GDP that will be
available by sellers at different price levels.
• The aggregate supply curve shows the
relationship between a nation's overall
price level, and the quantity of goods and
services produces by that nation's
suppliers.

15. Short-run Aggregate Supply
• A short run aggregate supply (SRAS)
curve essentially displays the supply of all
businesses in an economy. The SRAS
curve has a direct relationship between
economic output and price level, creating
a positive slope on the graph.

16. • The positive slop of the SRAS can be explained through
two major theories: the sticky price theory and the sticky
wage theory.
– According to the sticky price theory, prices of goods do not
change instantly when the price level rises. Because they don’t
change in price right away, goods are cheaper relative to the
higher price level. Consumers are able to purchase more goods
creating a small amount of economic growth. Businesses in turn
must supply more to satisfy the increased demand for goods.

17. – Wage theory: Workers often sign contracts with employers
determining salaries for years into the future. When workers are
paid a smaller real income then businesses consequently have
cheaper labor. With cheaper labor, businesses hire more
workers and expand, leading to a higher output of goods and
services. This leads to a positively sloping SRAS curve.

18. Long-run Aggregate
Theory
• Long run aggregate supply (LRAS)
displays the supply of an economy at
maximum capacity. In the long run, an
economy will always correct itself and
make its way back to maximum capacity
(full employment). Because of this, the
LRAS line is always vertical.

19. Determinants of
Aggregate Supply
• Long Run Aggregate Supply
– Size of the Labor Force
– Quantity/Quality of Capital
– Quantity/Quality of Resources
– Technology
– Health
– Education
• An increase in any of the determinants listed
above will lead to an increase in the LRAS of an
economy.

20. • Short Run
– Business costs – When costs of production increase, businesses cut
back on production and supply less. Thus, when business costs
increase, short run aggregate supply decreases and shifts to the left.
– Business taxes – When taxes increase, businesses lose revenue and
profit less from sales. Businesses will choose to supply less when taxes
are high in order to save supply for later times when profit can be
higher. Thus, an increase in business taxes leads to a decrease in short
run aggregate supply.
– Business regulations – Regulations cause businesses to move and
produce at slower rates as there become more “hoops” to jump through.
More government requirements must be satisfied and production is
slowed down. An increase in business regulations leads to a decrease
in production and the short run aggregate supply curve. Aggregate
Supply

21. Generalization

22. Aggregate Supply and Demand
Model

23. • The aggregate supply and demand model (AS/AD model
for short) is the most helpful graph in determining an
economy’s condition. The graph represents an economy
as a whole and displays the relationship between
economic output and the price level. An AS/AD model is
composed of three major parts; aggregate demand,
short run aggregate supply, and long run aggregate
supply.

24. Thank You