PPT On Laws of Supply and Demand

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Laws of Supply and Demand Presentation Transcript: 
1.DEMAND AND SUPPLY

2.Aggregate Demand
The relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant

3.Principle
Based on the quantity theory of money
        Determined solely by the quantity of money
Based on the components parts:
        Consumption, investment, government spending and net exports

4.Factors that Shift Aggregate Demand
An increase in the money supply shifts AD to the right because it lowers interest rates and stimulates investment spending
An increase in spending from any of the components C, I, G, NX, will also shift AD to the right

5.Long-run aggregate supply curve
It is determined by amount of capital and labor and the available technology
It is vertical at the natural rate of output generated by the natural rate of unemployment

6.Short-run aggregate supply curve
Wages and prices are sticky
Stickiness generates an upward sloping SRAS as firms attempt to take advantage of short-run profitability when price level rises

7.Factors that Shift SRAS
Costs of production:
1) Tightness of the labor market
2) Expected price level
3) Wage push
4) Change in production costs unrelated to wages (supply shocks)

8.Self-Correcting Mechanism
Regardless of where output is initially, it returns eventually to the natural rate
Slow
1) Wages are inflexible, particularly downward
2) Need for active government policy
Rapid
1) Wages and prices are flexible
2) Less need for government intervention

9.Conclusions
Shift in aggregate demand affects output only in the short run and has no effect in the long run
Shifts in aggregate demand affects only price level in the long run
Shift in short run aggregate supply affects output & price in the short run & has no effect in the long run