Econ notes number 2
Aggregate supply and aggregate demand.
AS-AD model is a model of an imaginary market for the total of all the final goods and services that make
up real GDP.
Quantity supplied and supply: the total quantity of goods and services, valued in constant base year
dollars, that firms plan to produce during given period.- depends on the quantity of labour employed,
quantity of physical and human capital, and the state of technology.
*the labour market can be in any one of three states: at full employment, above full employment or
below full employment.
Aggregated supply: the relationship between the quantity of real GDP supplied and the price level. It is
different in the long run and short run
Long run aggregated supply: the relationship between the quantity of real GDP supplied and the price
level when the money wage rate changes in step with the price level to achieve full employment.
Short run aggregated supply: the relationship between the quantity of real GDP supplied and the price
level when money wage rate, the price of other resources, and potential GDP remain constant.
Changes in Aggregated Supply
Changes in potential GDP: when GDP changes, aggregated supply changes. Potential GDP increases
because of three reasons: 1. An increase in the full employment quantity of labour
2. increase in the quantity of capital
3. advance in technology
Changes in the money wage rate and other factor prices
When the money price of something changes short run aggregated supply changes but not long run
The quantity of real GDP demanded (y) is the sum of real consumption expenditure (c ), investment (i),
goverments expenditures (G) and exports (X) minus imports (m)
The aggregated demand curve: described by an aggregated demand schedual and aggregate demand
curve. Why does it slop downward? For 2 reasons 1. Wealth effects: real wealth is t he amount of money in the banks, bonds, stocks, and other
assets people own. People have to save for something wich decreases consumption is a
decrease in aggregat