MACROECONOMIC EQUILIBRIUM: Putting it all Together

So, we have the aggregate supply curve and we have the aggregate demand curve.

AD measures levels of production which won't change over time as a function of price

AS measures levels of production which suppliers will actually produce at as a function of price.

SO... what happens when you put both of them together?

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Aggregate Supply

In the short run, we're going to assume that factor prices remain constant (but later on, this can change, as we look at the long run)

The short run aggregate supply curve shows the amount which firms are willing to produce at any given price level.

Aggregate Supply is positively sloped!

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Aggregate Demand

ECON 101 HELL WEEK BLOG REVIEW:

PART 1: DEMAND SIDE EXPENDITURE
PART 2: SUPPLY SIDE EXPENDITURE
PART 3: EQUILIBRIUM: PUTTING IT TOGETHER

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PART 1: DEMAND SIDE EXPENDITURE

We know that National Income is a function of Aggregate Expenditure. Thus far, we have been assuming that prices remain constant...

Newsflash! In real life, prices change (unless the firms contributing to GDP are monopolies, or they have excess capacity). We need to look at how this affects aggregate expenditure, and subsequently, national income.

We assume that output is demand-determined: that is, GDP will rise if general consumer demand rises, and it will fall with decreases in demand

OKAY: How does price affect aggregate demand? Well, it affects it in an inverse relationship. When the price level increases, aggregate expenditures shift down. When the price level decreases, aggregate expenditures shift up! Why?

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Putting it ALL together! Building and fiddling with aggregate expenditures!

 EQUILIBRIUM NATIONAL INCOME AND THE AGGREGATE EXPENDITURE FUNCTION:

REMEMEBER:

Consumption is a function of disposable income (income minus net taxes) and net taxes are taxes minus transfer payments.

So, when you add the government to the economy, you have to substitute (income minus net taxes) into the consumption equation!

As such, consumption is a function of income: C = f(Y) (the disposable part is now implicit with the addition of the government)

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