2.2/2.3 ( aggregate supply and aggregate demand)
components of AD
consumption
investment
government spending
disposable income relates how much money people have to spend on goods and services and is the most important factor in consumption.
what effects consumption
interest rates
consumer confidence
wealth effects
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if there are higher interest rates then it costs more for consumers to borrow
higher interest rates also make it more profitable to leave your money in the bank to get interest which reduces consumption spending
if consumers feel more confident in there jobs then they are more likley to feel confident to buy big tcket iteiems such as cars and houses
if peoples assets such as house prices or shares are appreciating in value then household will feel more comfortable spending large amounts of money called the wealth effect.
if the value of a families home goes up then they will be more likley to increase there spending
if the value of someones shares and stocks increases then they will be more willing to book a foreign holiday or home renovations
not all money earned by households is spent and some is saved and the average propensity to consume represents what percentage of disposable income people are spending
components of LRAS and SRAS
average propensity consumed=consumption/disposable time x 100.
gross investment and net investment
gross investment is the total amount of money spent on new investment
net investment is the total amount of additions to capital stock with the wear and tear of previous investment factored in.
therefore
net investment=gross investment - depreciation
gross investment =net investment +depreciation
what effects investment spending
strong economic growth willl encoutrage investment as firms need more capitia to meet icnreased demand which in turn makes a postive cycle
high buisness confidence and expections will make investment more likley
the "animal spirits" of investors and businessmen which represents the emotions and instincts of investors.
lower interest rates will make investing less expensive and provide less incentive to keep money in banks.
higher demand for exports will lead to a increased need of capital and therefore encourage investment.
however some firms may be relectunt to export due to the diffculties of regulation and tariffs in other countries.
level of red tape and regulation
government can decide to effect taxation and laws which directly relate to a firm
for example a cut in corportation tax will ecnourage investment.
the trade cycle
fiscal policy
the trade cycle refers to long term fluctuations in the gdp
duringa ressecion government spedning is naturally higher as there is greater demand for welfare benfits such as unemployment as well as stimuls packages
the government will spend less during a boom as there is less need for welfare
governments may manipulate total spending in the economy by changing there own levels of spending this is called discretionary fiscal policy
net trade (x-m) and what effects it
real income
changes in the exchange rate
state of the world economy
non price factors
if incomes in the economy rise then there iss less incentive to export as there is already a domestic market
higher incomes also increases demand for imports depending on the marginal propensity to import
if the exchange rate rises against other currencies then exports and reduced as uk goods become less competitive and imports cheaper.
however this may not be the case in the short run as the demand for exports and imports is quite price inelastic in the short run as spending patterns do not easily adjust to price changes
uk exports is highly dependent on growth rates around the world
if the global economy is strong then there s greater demand for exports from the uk and the oppostie during a ressecion such as in 2008 and 2020
demand for exports and imports may also be determined by factors other than price
quality and design
reliability
after sales service
transport costs
short run aggregate supply
long run aggregate supply
short run aggregate supply assumes that in the short term some resources e.g capital is fixed
however it is possible to use existing factors more intensively in the short term such as overtime hours for workers and using machinery 24/7
therefore a higher price may result in a increase in real output (in the short term)
long run aggregate supply assumes that all resources in the long term a variable.
it is not possible to permanently produce beyond the LRAS line.
factors of short run aggregate supply (also known as supply shocks)
factors of long run aggregate supply
change in the cost of raw materials such as a rise in the price of oil and electricity
change in exchange rates-if the pound is more valuable then its easier to buy raw resources
a fall in tax reduces producers costs and allows them to produce more
changes in tariffs,if the country increases the tariffs on imports then producers costs rise and production falls
long run aggregate supply is influenced by the quality and quantity of factors of production
quality
quantity
advances in technology such as robotics allows producers to cut costs
higher levels of education make citizens more productive
higher quality enterprise through competition policy
better ways to harvest resources such as advances in drills or oil rigs
increased migration increases the pool of labour
discovery of new resources increases the quantity of 'land'.
greater levels of enterprise will be caused by a reduction in government regulation
more investment will create more capital to work with