Understanding the dynamics of Aggregate Demand (AD) and Aggregate Supply (AS) is crucial for comprehending macroeconomic fluctuations. This topic is particularly significant for students pursuing AS & A Level Economics (9708), as it provides foundational insights into how shifts in AD and AS influence key economic indicators such as output, price level, and employment. Mastery of these concepts equips students with the analytical tools necessary to evaluate real-world economic scenarios and policy decisions.

Key Concepts

1. Aggregate Demand (AD) and Aggregate Supply (AS) Defined

Aggregate Demand (AD) represents the total quantity of goods and services demanded across all levels of an economy at a particular price level and in a given time period. It comprises four main components: Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX), summarized by the equation: $$AD = C + I + G + (X - M)$$ Aggregate Supply (AS), on the other hand, reflects the total output of goods and services that producers in an economy are willing and able to supply at a given overall price level. AS can be categorized into Short-Run Aggregate Supply (SRAS) and Long-Run Aggregate Supply (LRAS), each with distinct characteristics and determinants.

2. Shifts in Aggregate Demand

Shifts in AD occur when there is a change in one or more of its components (C, I, G, NX) other than the price level. Factors that can cause AD to shift include:

Changes in Consumer Confidence: Increased optimism can boost consumption (C), shifting AD to the right.
Fiscal Policy: Government increases in spending (G) or tax cuts can enhance AD.
Monetary Policy: Lower interest rates reduce the cost of borrowing, increasing investment (I).
Exchange Rates: A depreciation of the domestic currency can boost net exports (NX) by making exports cheaper and imports more expensive.

For example, during an economic expansion, consumers are more likely to spend, thereby increasing AD. Conversely, during a recession, reduced consumer spending can shift AD to the left.

3. Shifts in Aggregate Supply

Aggregate Supply can be influenced by factors affecting production costs and productivity.

Input Prices: A rise in wages or raw material costs can decrease SRAS, shifting it to the left.
Technology: Technological advancements can enhance productivity, increasing AS and shifting it to the right.
Government Policies: Regulations or taxes can affect production costs and influence AS.
Expectations: If producers expect higher future prices, they might restrict current supply, shifting AS leftward.

For instance, an improvement in technology allows producers to manufacture goods more efficiently, increasing AS and reducing the price level for a given level of output.

4. Equilibrium in AD-AS Model

The intersection of AD and AS determines the economy's equilibrium output and price level. When AD shifts:

Rightward Shift of AD: Leads to higher output and higher price levels.
Leftward Shift of AD: Results in lower output and lower price levels.

When AS shifts:

Rightward Shift of AS: Increases output and lowers price levels.
Leftward Shift of AS: Decreases output and increases price levels.

5. Effects on Output, Price Level, and Employment

The shifts in AD and AS have distinct impacts on key economic indicators:

Output (GDP): Increased AD or AS can lead to higher GDP, while decreased AD or AS can result in lower GDP.
Price Level: AD shifts rightward generally increase the price level, while shifts in AS can either increase (leftward) or decrease (rightward) the price level.
Employment: Higher output typically correlates with increased employment, whereas lower output can lead to higher unemployment.

For example, an expansionary fiscal policy that increases AD can boost output and employment but may also lead to higher price levels (inflation).

6. Short-Run vs. Long-Run Effects

In the short run, prices and wages may be sticky, meaning they do not adjust immediately to changes in AD or AS. This can lead to short-term fluctuations in output and employment without immediate changes in the price level. In the long run, flexible prices and wages allow the economy to return to its potential output, as represented by the LRAS curve. Here, shifts in AD primarily affect the price level, while shifts in AS can change the economy's potential output. For instance, a sustained increase in AD may initially increase output and employment, but over time, the price level adjusts, and the economy stabilizes at a higher price level with output returning to its natural level.

7. Policy Implications

Understanding AD and AS shifts is essential for formulating effective macroeconomic policies:

Fiscal Policy: Governments can influence AD through taxation and government spending to stabilize the economy.
Monetary Policy: Central banks can adjust interest rates and control money supply to influence AD.
Supply-Side Policies: Measures aimed at shifting AS rightward, such as investing in technology and education, can enhance long-term economic growth.

For example, during a recession, expansionary fiscal policy can shift AD to the right, increasing output and reducing unemployment.

8. Potential Shortcomings and Limitations

While the AD-AS model is a powerful tool for analyzing economic fluctuations, it has limitations:

Simplistic Assumptions: Assumes price levels are uniform and may not account for sector-specific variations.
Static Analysis: Often depicts a snapshot in time without considering dynamic changes.
Exclusion of External Factors: May overlook global economic influences and supply chain complexities.

Despite these limitations, the AD-AS framework remains integral for understanding macroeconomic principles and policy impacts.

Advanced Concepts

1. Long-Run Aggregate Supply (LRAS) and Potential Output

Long-Run Aggregate Supply (LRAS) represents the level of output an economy can produce when using all resources efficiently, at full employment. Unlike SRAS, LRAS is vertical, indicating that in the long run, output is determined by factors such as technology, capital, and labor, rather than the price level. The concept of potential output ($Y_p$) is central to LRAS. It signifies the maximum sustainable output an economy can achieve without generating inflationary pressures. Shifts in LRAS occur due to changes in:

Technological Advancements: Improve productivity, shifting LRAS rightward.
Labor Force Growth: Increases the economy's capacity to produce goods and services.
Capital Accumulation: Investments in infrastructure and machinery enhance production capabilities.

Mathematically, potential output can be expressed as: $$Y_p = A \cdot F(K, L)$$ where $A$ represents technology, $K$ is capital, and $L$ is labor.

2. The Phillips Curve and AD-AS Interaction

The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting a short-term trade-off between the two. Integrating the AD-AS model with the Phillips Curve provides deeper insights into macroeconomic policy effects. When AD shifts rightward, it can reduce unemployment and increase inflation, aligning with the Phillips Curve's implications. Conversely, a leftward shift in AD may increase unemployment and decrease inflation. The interplay between AD-AS and the Phillips Curve highlights the tensions policymakers face when balancing economic growth and price stability.

3. Supply Shocks and Their Economic Impact

Supply shocks refer to unexpected events that suddenly change the supply side of the economy, affecting AS independently of AD. They can be:

Positive Supply Shocks: Such as technological breakthroughs, enhance AS, leading to higher output and lower price levels.
Negative Supply Shocks: Like natural disasters or oil price spikes, reduce AS, causing lower output and higher price levels.

Negative supply shocks can lead to stagflation, a combination of stagnant output and rising inflation, posing significant challenges for policymakers.

4. Expectations and the AS Curve

Expectations about future economic conditions can influence both AD and AS:

Inflation Expectations: If workers expect higher future inflation, they may demand higher wages, increasing production costs and shifting SRAS leftward.
Business Expectations: Optimistic business forecasts can lead to higher investment, shifting AD rightward.

Rational expectations theory posits that economic agents use all available information to make forecasts, potentially mitigating the effects of AD and AS shifts by anticipating policy changes.

5. Open Economy AD-AS Model

In an open economy, international trade plays a pivotal role in the AD-AS framework. Net exports (NX) become a crucial component of AD, influenced by exchange rates, global economic conditions, and trade policies. Key considerations include:

Exchange Rate Fluctuations: Affect the competitiveness of exports and imports.
Global Economic Health: Impacts demand for a country's exports.
Trade Policies: Tariffs and quotas can influence NX by altering trade flows.

Incorporating the open economy perspective underscores the interconnectedness of national economies and how external factors can drive shifts in AD and AS.

6. The Role of Expectations in Long-Run AS

In the long run, expectations about inflation and economic policies can shift LRAS. For example, sustained high inflation expectations can erode real wages, reduce labor supply, and ultimately decrease potential output, shifting LRAS leftward. Conversely, credible policies aimed at enhancing productivity and economic stability can bolster LRAS by fostering a favorable environment for investment and innovation.

7. Natural Rate of Unemployment and AS

The natural rate of unemployment ($u_n$) is the level of unemployment consistent with stable inflation, accounting for frictional and structural factors. Shifts in AS can influence the natural rate:

Rightward Shift of AS: Can lower the natural rate by enhancing job opportunities and reducing structural unemployment.
Leftward Shift of AS: May increase the natural rate by diminishing economic opportunities and exacerbating structural issues.

Understanding the natural rate is essential for evaluating the long-term impacts of AD and AS shifts on the labor market.

8. Policy Trade-offs and the AD-AS Framework

Policymakers often face trade-offs when addressing economic issues through the AD-AS lens:

Inflation vs. Unemployment: Expansionary policies may reduce unemployment but risk increasing inflation.
Short-Run vs. Long-Run Outcomes: Policies effective in the short run might have adverse long-term effects, such as higher inflation expectations.

Balancing these trade-offs requires a nuanced understanding of the AD-AS dynamics and the underlying economic conditions.

9. Mathematical Derivations in AD-AS Analysis

Quantitative analysis enhances the understanding of AD-AS interactions. For instance, calculating the change in equilibrium price level and output using elasticity measures involves the following:

Price Elasticity of AD: Measures the responsiveness of AD to changes in the price level.
Price Elasticity of AS: Assesses how AS responds to price changes.

Applying these elasticities can predict the magnitude of shifts: $$\Delta Y = \frac{\Delta AD}{\text{Price Elasticity of AD} + \text{Price Elasticity of AS}}$$ This formula estimates the change in output ($\Delta Y$) resulting from a shift in AD, considering the responsiveness of both AD and AS to price changes.

10. Interdisciplinary Connections: AD-AS and Financial Markets

The AD-AS framework intersects with financial markets, as fluctuations in AD and AS can influence investment decisions, interest rates, and asset prices. For example:

Interest Rates: Central bank policies affecting AD through monetary measures can impact bond and stock markets.
Investment Returns: Expectations of economic growth (AD shifts) influence investor confidence and capital flows.

Understanding these connections highlights the broader implications of AD and AS shifts beyond the real economy, encompassing financial stability and investment dynamics.

11. Real-World Applications and Case Studies

Applying the AD-AS model to real-world scenarios reinforces its practical relevance. Consider the 2008 Global Financial Crisis:

AD Shift: The crisis led to a significant leftward shift in AD due to reduced consumer confidence and investment.
AS Shift: Supply disruptions and increased production costs further shifted AS leftward.
Outcomes: The economy experienced recessionary pressures, increased unemployment, and deflationary trends.

Analyzing such events through the AD-AS lens aids in understanding the multifaceted impacts of economic shocks and the effectiveness of policy responses.

12. Criticisms and Alternative Models

While the AD-AS model provides valuable insights, it faces criticisms and alternative approaches:

New Keynesian Economics: Emphasizes price stickiness and market imperfections, offering more nuanced explanations of macroeconomic phenomena.
Real Business Cycle Theory: Attributes economic fluctuations to real shocks, such as technology changes, rather than demand-side factors.
Monetarist Perspective: Focuses on the role of money supply and its direct impact on price levels and economic activity.

These alternative models complement the AD-AS framework, providing a more comprehensive understanding of macroeconomic dynamics.

Comparison Table

Aspect	Aggregate Demand (AD)	Aggregate Supply (AS)
Definition	Total demand for goods and services in an economy at a given price level.	Total output producers are willing to supply at a given price level.
Components	Consumption, Investment, Government Spending, Net Exports.	Resource prices, technology, government policies, expectations.
Shifts Cause	Changes in C, I, G, NX due to fiscal/monetary policies, consumer confidence.	Changes in production costs, technology, resource availability.
Effect on Output	Right shift increases output; left shift decreases output.	Right shift increases output; left shift decreases output.
Effect on Price Level	Right shift raises price level; left shift lowers price level.	Right shift lowers price level; left shift raises price level.
Policy Tools	Fiscal policy, monetary policy.	Supply-side policies, regulatory changes.

Summary and Key Takeaways

AD and AS shifts fundamentally impact an economy's output, price level, and employment.
Aggregate Demand comprises Consumption, Investment, Government Spending, and Net Exports.
Aggregate Supply is influenced by production costs, technology, and resource availability.
Understanding the AD-AS model aids in analyzing policy effects and economic fluctuations.
Advanced concepts include long-run supply, expectations, and interdisciplinary connections.

Examiner Tip

Tips

To master AD/AS concepts, use the acronym CIGNX to remember Aggregate Demand components: Consumption, Investment, Government Spending, Net Exports. Visualize the AD-AS model by sketching the curves and labeling shifts under different scenarios. Practice past exam questions to identify patterns and reinforce understanding. Additionally, connect theoretical concepts to current economic events to better retain information and apply knowledge effectively during AP exams.

Did You Know

Did you know that the concept of Aggregate Demand and Aggregate Supply was first introduced during the Great Depression to better understand economic fluctuations? Additionally, technological advancements not only shift the AS curve but have been pivotal in shaping entire economies, such as the Silicon Valley revolution boosting the U.S. economy. Another surprising fact is that supply shocks, like sudden oil price increases, can lead to stagflation—a rare combination of stagnation and inflation—impacting both consumers and producers globally.

Common Mistakes

Mistake 1: Confusing shifts with movements along the AD or AS curves.
Incorrect: Believing a price level increase moves AD left.
Correct: A price level change causes movement along AD, not a shift.

Mistake 2: Ignoring the distinction between short-run and long-run AS.
Incorrect: Treating AS shifts the same in both the short and long run.
Correct: Short-run AS can be affected by wage rigidity, while long-run AS is vertical and determined by resources.

FAQ

What causes the Aggregate Demand curve to shift?

Aggregate Demand shifts due to changes in Consumption, Investment, Government Spending, or Net Exports. Factors like fiscal policy, consumer confidence, and exchange rates can trigger these shifts.

How does a leftward shift in AS affect the economy?

A leftward shift in Aggregate Supply leads to higher price levels and reduced output, potentially increasing unemployment and causing inflationary pressures.

What is the difference between SRAS and LRAS?

Short-Run Aggregate Supply (SRAS) is upward sloping and reflects production with fixed wages and prices, while Long-Run Aggregate Supply (LRAS) is vertical, representing the economy's potential output at full employment.

How do fiscal policies influence AD?

Fiscal policies, like increased government spending or tax cuts, boost Aggregate Demand by increasing consumption and investment, thereby shifting the AD curve to the right.

Can expectations affect both AD and AS?

Yes, expectations about future inflation can shift AD by influencing consumer and business spending, and shift AS by affecting wage demands and production costs.

1. The price system and the microeconomy

1.1 Types of cost, revenue and profit, short-run and long-run production

1.1.1 Short-run cost function: TC, AC, MC, TFC, TVC, AFC, AVC

1.1.2 Long-run production and returns to scale

1.1.3 Long-run cost curve and minimum efficient scale

1.1.4 Economies and diseconomies of scale

1.1.5 Revenue definitions and calculation: TR, AR, MR

1.1.6 Normal, subnormal and supernormal profit

1.1.7 Short-run production function and law of diminishing returns

1.2 Different market structures

1.2.1 Market types: perfect, monopoly, monopolistic, oligopoly, natural monopoly

1.2.2 Structure: number of firms, product type, barriers to entry

1.2.3 Performance in different markets: revenues, output, profit, supply curve, efficiency

1.2.4 Oligopoly: collusion, price/non-price competition, Prisoner's Dilemma

1.2.5 Concentration ratio

1.3 Growth and survival of firms

1.3.1 Reasons for different firm sizes

1.3.2 Internal and external growth: horizontal, vertical, conglomerate

1.3.3 Cartels and their consequences

1.3.4 Principal–agent problem

1.4 Differing objectives and policies of firms

1.4.1 Profit-maximisation and alternative objectives

1.4.2 Price discrimination: types, conditions, consequences

1.4.3 Other pricing policies: limit, predatory, price leadership

1.4.4 PED and firm revenue in different demand curves

1.5 Utility

1.5.1 Definition and calculation of total and marginal utility

1.5.2 Diminishing marginal utility

1.5.3 Equi-marginal principle

1.5.4 Derivation of individual demand curve

1.5.5 Limitations of marginal utility theory

1.6 Indifference curves and budget lines

1.6.1 Meaning of indifference curve and budget line

1.6.2 Causes of shifts in budget line

1.6.3 Income, substitution, and price effects

1.6.4 Limitations of indifference curve model

1.7 Efficiency and market failure

1.7.1 Productive and allocative efficiency

1.7.2 Pareto optimality and dynamic efficiency

1.7.3 Definition and causes of market failure

1.8 Private costs and benefits, externalities and social costs and benefits

1.8.1 Calculation of social, private and external costs and benefits

1.8.2 Positive and negative externalities in consumption and production

1.8.3 Deadweight welfare losses and asymmetric information

2. The Macroeconomy

2.1 Price stability

2.1.1 Consequences of inflation

2.1.2 Definition of inflation, deflation, disinflation

2.1.3 Measurement: CPI and difficulties

2.1.4 Nominal vs real values

2.1.5 Causes of inflation: cost-push and demand-pull

2.2 National income statistics

2.2.1 Meaning of national income

2.2.2 Measurement: GDP, GNI, NNI

2.2.3 Adjustment from market to basic prices

2.2.4 Adjustment from gross to net values

2.3 Circular flow of income

2.3.1 Circular flow in closed and open economies

2.3.2 Injections and leakages (multiplier not required)

2.3.3 Equilibrium and disequilibrium (no propensities)

2.4 Aggregate Demand and Aggregate Supply analysis

2.4.1 Definition and components of Aggregate Demand

2.4.2 Shape and shifts of AD curve

2.4.3 Definition and determinants of Aggregate Supply

2.4.4 Shape of AS in short run and long run

2.4.5 Shifts in AS in short and long run

2.4.6 Movement along vs shift in AD and AS

2.4.7 Establishing equilibrium in AD/AS model

2.4.8 Effects of AD/AS shifts on output, price level, and employment

2.5 Economic growth

2.5.1 Meaning and measurement of economic growth

2.5.2 Nominal vs real GDP growth

2.5.3 Causes and consequences of economic growth

2.6 Unemployment

2.6.1 Meaning and measures of unemployment

2.6.2 Causes and types: frictional, structural, cyclical, seasonal, technological

2.6.3 Consequences of unemployment

3. International economic issues

3.1 Relationship between countries at different levels of development

3.1.1 External debt: causes and consequences

3.1.2 Role of IMF and World Bank

3.1.3 International aid: forms, reasons, effects

3.1.4 Trade and investment

3.1.5 Multinational companies: definition, activities, consequences

3.1.6 Foreign Direct Investment: definition and consequences

3.2 Globalisation

3.2.1 Meaning, causes, and consequences of globalisation

3.2.2 Free trade area, customs union, monetary union, economic union

3.2.3 Trade creation and trade diversion

3.3 Policies to correct disequilibrium in the balance of payments

3.3.1 Balance of payments accounts: current, financial, and capital

3.3.2 Impact of fiscal, monetary, supply-side, protectionist and exchange rate policies

3.3.3 Expenditure-switching vs expenditure-reducing policies

3.4 Exchange rates

3.4.1 Measurement of exchange rates: nominal vs real

3.4.2 Trade-weighted exchange rates

3.4.3 Fixed and managed exchange rate determination

3.4.4 Revaluation vs devaluation of fixed exchange rate

3.4.5 Effects of exchange rate changes: Marshall-Lerner and J curve

3.5 Economic development

3.5.1 Classification by development and national income

3.5.2 Indicators of living standards and development: monetary, non-monetary, composite

3.5.3 Comparison of growth and living standards across countries and over time

3.6 Characteristics of countries at different levels of development

3.6.1 Population: birth/death rate, infant mortality, migration, urbanisation

3.6.2 Income distribution: Gini coefficient, Lorenz curve

3.6.3 Economic structure: employment sectors, trade patterns

4. The macroeconomy

4.1 Economic growth and sustainability

4.1.1 Positive and negative output gaps

4.1.2 Business (trade) cycle: phases, causes, stabilisers

4.1.3 Policies to promote economic growth and their effectiveness

4.1.4 Definition and effects of inclusive economic growth

4.1.5 Definition and effects of sustainable economic growth

4.1.6 Policies to mitigate impact of growth on environment

4.1.7 Actual vs potential growth

4.2 Employment/unemployment

4.2.1 Full employment: definition

4.2.2 Equilibrium and disequilibrium unemployment (including hysteresis)

4.2.3 Voluntary and involuntary unemployment

4.2.4 Natural rate of unemployment: definition, determinants, policy implications

4.2.5 Trends in employment and unemployment

4.2.6 Labour mobility: geographical and occupational

4.2.7 Policies to reduce unemployment and their effectiveness

4.3 Money and banking

4.3.1 Definition, functions, and characteristics of money

4.3.2 Definition of money supply and quantity theory of money (MV=PT)

4.3.3 Functions and objectives of commercial banks

4.3.4 Causes of changes in money supply in open economy

4.3.5 Credit creation, central bank role, government deficit financing, quantitative easing

4.3.6 Policies to reduce inflation and their effectiveness

4.3.7 Demand for money: liquidity preference theory

4.3.8 Interest rate determination: loanable funds and Keynesian theory

4.4 The circular flow of income

4.4.1 The multiplier: definition and calculation in different economies

4.4.2 Propensities: APS, MPS, APC, MPC, APM, MPM, ART, MRT

4.4.3 National income determination using AD and income approach

4.4.4 Effect of AD changes on national income using the multiplier

4.4.5 Components and determinants of AD: consumption, savings, investment, government spending, net export

4.4.6 Full employment and equilibrium level of national income

4.4.7 Inflationary and deflationary gaps

5. The price system and the microeconomy

5.1 Price elasticity of supply

5.1.1 Factors affecting PES

5.1.2 Implications for speed of response to market changes

5.1.3 Definition of PES

5.1.4 Formula and calculation of PES

5.1.5 Interpretation of PES coefficients

5.2 The interaction of demand and supply

5.2.1 Market equilibrium and disequilibrium

5.2.2 Shifts in demand and supply affecting equilibrium

5.2.3 Relationships between markets: complements, substitutes, derived demand, joint supply

5.2.4 Functions of price: rationing, signalling, incentivising

5.3 Consumer and producer surplus

5.3.1 Meaning and significance of consumer surplus

5.3.2 Meaning and significance of producer surplus

5.3.3 Causes of changes in consumer and producer surplus

5.3.4 Elasticity’s role in determining surplus changes

5.4 Demand and supply curves

5.4.1 Effective demand

5.4.2 Individual and market demand and supply

5.4.3 Determinants of demand

5.4.4 Determinants of supply

5.4.5 Causes of a shift in the demand curve

5.4.6 Causes of a shift in the supply curve

5.4.7 Shift vs movement along demand/supply curves

5.5 Price elasticity, income elasticity and cross elasticity of demand

5.5.1 Definitions of PED, YED, XED

5.5.2 Formulae and calculation of PED, YED, XED

5.5.3 Interpretation of elasticity coefficients

5.5.4 Types of elasticity: elastic, inelastic, unitary

5.5.5 Variation in PED along a straight-line demand curve

5.5.6 Factors affecting PED, YED, XED

5.5.7 Relationship between PED and total expenditure

5.5.8 Decision-making implications of PED, YED, XED

6. Government macroeconomic intervention

6.1 Government macroeconomic policy objectives

6.1.1 Using policy to achieve price stability, low unemployment, and economic growth

6.2 Fiscal policy

6.2.1 Meaning of government budget

6.2.2 Government budget deficit vs surplus

6.2.3 Meaning and significance of national debt

6.2.4 Types of taxes and tax rates

6.2.5 Reasons for taxation

6.2.6 Types and reasons for government spending

6.2.7 Expansionary vs contractionary fiscal policy

6.2.8 AD/AS analysis of fiscal policy impact

6.3 Monetary policy

6.3.1 Definition and tools of monetary policy

6.3.2 Expansionary vs contractionary monetary policy

6.3.3 AD/AS analysis of monetary policy impact

6.4 Supply-side policy

6.4.1 Meaning and objective of supply-side policy

6.4.2 Tools of supply-side policy

6.4.3 AD/AS analysis of supply-side policy impact

7. Basic economic ideas and resource allocation

7.1 Scarcity, choice and opportunity cost

7.1.1 Fundamental economic problem of scarcity

7.1.2 Need to make choices at all levels (individuals, firms, governments)

7.1.3 Nature and definition of opportunity cost, arising from choices

7.1.4 Basic questions of resource allocation: what, how, for whom

7.2 Economic methodology

7.2.1 Economics as a social science

7.2.2 Positive and normative statements

7.2.3 Meaning of the term ceteris paribus

7.2.4 Importance of the time period (short run, long run, very long run)

7.3 Factors of production

7.3.1 Definition of land, labour, capital and enterprise

7.3.2 Human capital vs physical capital

7.3.3 Rewards to the factors of production

7.3.4 Division of labour and specialisation

7.3.5 Role of the entrepreneur: risk and organisation

7.4 Resource allocation in different economic systems

7.4.1 Decision-making in market, planned and mixed economies

7.4.2 Resource allocation processes in different systems

7.5 Production possibility curves

7.5.1 Nature and meaning of a production possibility curve (PPC)

7.5.2 Shape of PPC: constant and increasing opportunity costs

7.5.3 Causes and consequences of shifts in a PPC

7.5.4 Significance of a position within a PPC

7.6 Classification of goods and services

7.6.1 Free goods and private goods (economic goods)

7.6.2 Public goods: nature and definition

7.6.3 Merit goods and under-consumption due to imperfect information

7.6.4 Demerit goods and over-consumption due to imperfect information

8. Government microeconomy intervention

8.1 Reasons for government intervention in markets

8.1.1 Addressing the non-provision of public goods

8.1.2 Addressing over-consumption of demerit goods and under-consumption of merit goods

8.1.3 Controlling prices in markets

8.2 Methods and effects of government intervention in markets

8.2.1 Impact and incidence of specific indirect taxes

8.2.2 Impact and incidence of subsidies

8.2.3 Direct provision of goods and services

8.2.4 Maximum and minimum prices

8.2.5 Buffer stock schemes

8.2.6 Provision of information

8.3 Addressing income and wealth inequality

8.3.1 Difference between income as a flow and wealth as a stock

8.3.2 Measuring inequality: Gini coefficient

8.3.3 Economic reasons for income and wealth inequality

8.3.4 Policies to redistribute income and wealth: minimum wage, transfer payments, progressive taxes, stat

9. International economic issues

9.1 The reasons for international trade

9.1.1 Absolute vs comparative advantage

9.1.2 Benefits of specialisation and free trade

9.1.3 Terms of trade: measurement, causes, impact

9.1.4 Limitations of trade theories

9.2 Protectionism

9.2.1 Meaning and context of protectionism

9.2.2 Tools of protection: tariffs, quotas, subsidies, embargoes, red tape

9.2.3 Arguments for and against protectionism

9.3 Current account of the balance of payments

9.3.1 Components of the current account

9.3.2 Calculation of trade balances and CAB

9.3.3 Causes and consequences of imbalances

9.4 Exchange rates

9.4.1 Definition and determination of floating exchange rates

9.4.2 Depreciation vs appreciation of exchange rates

9.4.3 Causes of exchange rate changes

9.4.4 Impact of exchange rate changes using AD/AS

9.5 Policies to correct imbalances in the current account

9.5.1 Objective of stability in current account

9.5.2 Use of fiscal, monetary, supply-side and protectionist policies

10. Government microeconomic intervention

10.1 Government policies to achieve efficient resource allocation and correct market failure

10.1.1 Application and effectiveness of taxes and subsidies

10.1.2 Use of price controls and production quotas

10.1.3 Prohibitions, licences, and direct provision

10.1.4 Pollution permits and property rights

10.1.5 Nationalisation and privatisation

10.1.6 Provision of information and behavioural insights

10.1.7 Definition, causes and consequences of government failure

10.2 Equity and redistribution of income and wealth

10.2.1 Equity vs equality

10.2.2 Equity vs efficiency

10.2.3 Absolute vs relative poverty

10.2.4 Poverty trap

10.2.5 Policies: negative income tax, universal and means-tested benefits, basic income

10.3 Labour market forces and government intervention

10.3.1 Derived demand and factors affecting labour demand

10.3.2 Shifts vs movement along labour demand curve

10.3.3 Marginal revenue product and labour demand

10.3.4 Factors affecting labour supply: wage and non-wage

10.3.5 Shifts vs movement along labour supply curve

10.3.6 Wage determination in perfect labour markets

10.3.7 Imperfect markets: trade unions, minimum wage, monopsony

10.3.8 Wage differentials from market forces

10.3.9 Transfer earnings and economic rent

11. Government macroeconomic intervention

11.1 Government macroeconomic policy objectives

11.1.1 Objectives: inflation, BoP, unemployment, growth, development, sustainability, redistribution

11.2 Links between macroeconomic problems and their interrelatedness

11.2.1 Internal vs external value of money

11.2.2 Balance of payments and inflation

11.2.3 Growth and inflation

11.2.4 Growth and balance of payments

11.2.5 Inflation and unemployment: traditional and expectations-augmented Phillips curve

11.3 Effectiveness of policy options to meet all macroeconomic objectives

11.3.1 Fiscal, monetary, supply-side, exchange rate and trade policies

11.3.2 Policy conflicts and problems

11.3.3 Macroeconomic government failure

Get PDF

PDF

Explore

Your Flashcards are Ready!

Effects of AD/AS Shifts on Output, Price Level, and Employment

Introduction