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August 20, 2019, 01:30:23 pm

Author Topic: Aggregate Supply-side Factors  (Read 241 times)  Share 

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Seamus Wong

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Aggregate Supply-side Factors
« on: March 25, 2019, 07:19:45 pm »
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Hi Guys,

Could someone please explain to me the effects of changes in aggregate demand and aggregate supply on the level of economic growth, employment and price levels?

Your help is much appreciated

vox nihili

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Re: Aggregate Supply-side Factors
« Reply #1 on: March 25, 2019, 07:38:24 pm »
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Hi Guys,

Could someone please explain to me the effects of changes in aggregate demand and aggregate supply on the level of economic growth, employment and price levels?

Your help is much appreciated

What do you know about it already? :) That way we can just help point out the gaps!
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Seamus Wong

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Re: Aggregate Supply-side Factors
« Reply #2 on: March 25, 2019, 08:14:21 pm »
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I know that as Aggregate demand increases in response to more favourable AD conditions (e.g. Increased household disposable incomes, Rise in business and consumer confidence, lowered interest rates, etc), firms experience decreases in their levels of unsold stock, and increases in sales, prompting them to produce more (given that there exists unused productive capacity). This greater level of production increases the level of economic growth. In order to sustain these higher levels of production, firms now demand more natural, capital and labour resources from the household sector. Employment opportunities naturally rise, as do incomes. In this favourable scenario, households and private businesses are more willing and able to purchase a given quantity of goods at all given prices, increasing demand-pull inflation (i.e. increasing General Price Levels).

My understanding of Aggregate Supply and its effects are also similar to that of AD:

With more favourable AS conditions (e.g. Increased Productivity growth, reduced cost of production, changes in technology, higher exchange rate, improved quality and quantity of factors of production, etc.) firms become more willing and able to supply. As such, the number of firms expanding their operations increases. This expansion facilitates the subsequent growth in production levels, leading to a rise in economic growth. With growing economic activity, the demand for natural, capital and labour resources strengthens, leading to lowered levels of unemployment and higher incomes. General levels of economic prosperity should increase provided inflation remains at a sustainable rate of 2-3%.
-------> What could I link 'price levels' to in this explanation? I can't seem to understand how price levels would increase or decrease given an increase or decrease in Aggregate Supply.
- I was thinking that as firms experience greater profit margins due to, for example, a decrease in production costs, they pass on savings to consumers through lowering their price levels, reducing cost inflation.
^^ Is that correct?


Chelsea f.c.

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Re: Aggregate Supply-side Factors
« Reply #3 on: March 25, 2019, 08:56:35 pm »
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If there's more supply goods aren't scarce so there cheap and vice versa... use a graph to reassure yourself
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Chelsea f.c.

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Re: Aggregate Supply-side Factors
« Reply #4 on: March 25, 2019, 08:59:03 pm »
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Oh and to add to that real GDP is goods divided by prices so increases
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IThinkIFailed

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Re: Aggregate Supply-side Factors
« Reply #5 on: March 28, 2019, 09:35:52 am »
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I know that as Aggregate demand increases in response to more favourable AD conditions (e.g. Increased household disposable incomes, Rise in business and consumer confidence, lowered interest rates, etc), firms experience decreases in their levels of unsold stock, and increases in sales, prompting them to produce more (given that there exists unused productive capacity). This greater level of production increases the level of economic growth. In order to sustain these higher levels of production, firms now demand more natural, capital and labour resources from the household sector. Employment opportunities naturally rise, as do incomes. In this favourable scenario, households and private businesses are more willing and able to purchase a given quantity of goods at all given prices, increasing demand-pull inflation (i.e. increasing General Price Levels).

My understanding of Aggregate Supply and its effects are also similar to that of AD:

With more favourable AS conditions (e.g. Increased Productivity growth, reduced cost of production, changes in technology, higher exchange rate, improved quality and quantity of factors of production, etc.) firms become more willing and able to supply. As such, the number of firms expanding their operations increases. This expansion facilitates the subsequent growth in production levels, leading to a rise in economic growth. With growing economic activity, the demand for natural, capital and labour resources strengthens, leading to lowered levels of unemployment and higher incomes. General levels of economic prosperity should increase provided inflation remains at a sustainable rate of 2-3%.
-------> What could I link 'price levels' to in this explanation? I can't seem to understand how price levels would increase or decrease given an increase or decrease in Aggregate Supply.
- I was thinking that as firms experience greater profit margins due to, for example, a decrease in production costs, they pass on savings to consumers through lowering their price levels, reducing cost inflation.
^^ Is that correct?
To link price levels in to your explanation, I reckon that you should talk about how a surplus is caused by an increase in output at all price levels, leading to firms discounting prices in order to clear unused stock, and thus, (assuming firms are profit seekers) there will be downward pressure on general price levels in the economy.

This is what my tutor told me, that you can still technically talk about the market mechanism in macroeconomics, you just need to use different words like “output” or “general price levels”.
« Last Edit: March 28, 2019, 09:37:25 am by IThinkIFailed »
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Seamus Wong

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Re: Aggregate Supply-side Factors
« Reply #6 on: March 28, 2019, 10:41:42 pm »
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That makes sense, since the discounted prices serve the function of increasing demand to help clear unsold stock.

Thank you for your help, I really appreciate it.