24-Aggregate (supply/Demand)

  1. Accomplishing the four goals of macroeconomics at the same time is tricky and the aggregate supply/aggregate demand model is a good way to look at this relationship
    1. Aggregate supply is the total amount of goods and services produced in an economy at a given overall price at a given time level limited by potential GDP(potential GDP is the state where all people are employed and all machines and materials are in full use
      1. It is limited by potential GDP(potential GDP is the state where all people are employed and all machines and materials are in full use
      2. Productive potential tends to grow at a rate of 2-3%
      3. ….among others, it’s as a result of new innovations
      4. However, certain conditions can influence the entire chain, such as energy costs
    2. Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level in a given time period
  2. Aggregate supply must equal aggregate demand; however, there are differing theories which account for the way they operate. They are Say’s law and Keynes’ law
    1. Say’s law says that production is the source of demand
      1. Or, supply creates its own demand, the neoclassical economist would say, because….
      2. …..every sale is income for someone(s)
      3. There are a few questions which arise, why are there recessions if you can just supply things, and why would an economy shrink
    2. Keynes’s law states that demand is the source of supply
      1. The economy will find itself at times with unemployed workers and product just lying around. They feel there just needs to be demand stimulation ….
      2. This is done by lowering taxes or providing subsidies and when the economy gets to grow “too much” then enact taxes and fees to depress the economy.
      3. Why doesn’t the Gov’t just stimulate to the countries content, there never has to be recessions
      4. There are limits to supply, however, which could bridle stimulation and could increase the rate of inflation
      5. This is the basis for Keynesian economics
    3. Due to fluctuations in consumer confidence and investing and business behavior coupled with the fact that wages/prices tend to be sticky(inelastic) aggregate demand may lag behind in the short run
      1. Companies want a relatively quick turnaround when buying and selling
        1. If not they back log projects
        2. Then strike with many jobs when the time is right
      2. In the 90’s a new information medium, the internet, emerged and with it, a flood of investments but in the 2000’s investments have slowed from the initial flurry.
    4. In the long run, however, aggregate supply determines the size of the economy with the occasional run ahead or behind of aggregate demand to create a recession or inflation.

     
     

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