Aggregate Demand

Created
March 18, 2022 02:10 PM
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The higher the price level, the fewer goods will be demanded in the economy
Income stays same less can be afforded
Eat component behaves slightly different
C+I+G+(x-m)
 
Price Level = inflation
real output = taking inflation into acc
 

Reasons for downward sloping AD

1.
wealth effect: If income stays the same and price level goes up, then less can be afforded
2.
Rate of interest effect: Higher interest rates reduces spending and increases saving
3.
International trade effect: Increase in price level makes ecports less competitive
 
notion image
 

Consumer Expenditure

Definition: Household spending on goods and services, also known as consumption
 
Factors that affect Consumer Expenditure
1.
Real disposable income
2.
Wealth (income+Assets)
3.
Consumer confidence
4.
Rate of interest (ROI)
5.
Population age structure
6.
Income distribution
7.
Inflation rate
 
In looking at consumer demand for goods, we look ash two categories of goods, durable and non-durable goods.
Durable goods: here are goods that are used by the consumer over a period of time (usually more than one year), For example, Cars computers, mobile phones, bicycles.
Non-durable Goods: These are goods that are used p immediately or over a relatively short period of time.
Household spending on G
The largest component of AD
The main influence is disposable income: more income, more spending.
however the important factor is that generally an increase. in income means an increase in consumption (Ad shifts to the rights)
Changes in income often occur doe to tao changes or NI contribution changes
Higher interest rates will also shift AD to the left as consumer spending falls.

Investment Expenditure

Investment is also knows as the addition of capital stock to the economy. Investments carried out by firms. Firms have two types of investment
Replacement investment - this occurs when firms spend on capital in order to maintain the productivity of their existing capital
induced investment - this occurs when firms spend on capital to increase their output to respond to higher demand in the economy.
 
Factors effectio n Investment Expenditure
1.
Change in real disposable income
2.
Expectations
3.
Capacity Utilisation
4.
Profit levels
5.
Corporation tax
6.
Rate of interest
7.
Technology available
8.
price of capital equipment
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Investment is not to be confused with buying shares or putting momey into a bank
We tend to call this investments in ‘everyday’ English but it is in fact ‘saving’ as it is a leakage from the circular flow of income.

Government Spending

Mar 22, 2022

Definition: Spending by central and local government on goods and services
Factor's affecting it:
Government views
Lwbel of econpmics activities
electorate
War and other threads
 
Government Spending
Defence
Health
SOcial Welfare
Education
Foreign Aid
Regions
Industry
Law and Order
 

Net Exports

Definition: The valure of exprots minus imports
Factors affection Net Exports:
Real disposable income abroad
Real disposable income at home
Domestic price level
Exchange rate
Government restrictions on free trade (Tarrifs /Quotas/subsidy
 
 
10 marker on market dfailiure
 
Def pos /neg externalities
 
gov policies to correct or solve the market failiure
 
external costs
private cost