Aggregate Demand

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Aggregate Demand (AD)

AD is equal to the sum of net exports, consumption, investment and government spending at a given price level.

Aggregate Demand

Aggregate Demand (AD) = Consumption (C) + Investment (I) + Government Spending (G) + Net Trade/Exports-Imports (X-M).
Arguably, consumption is the most important component of the aggregate demand curve.

Aggregate demand curve

The AD curve is downward sloping.
Consumption will fall as the price level rises - a movement (not a shift) along the AD curve.

Shifts and Movements in the Aggregate Demand Curve

As well as movements along, the AD and AS curves can shift because of changes in the demand or supply side of the economy.

Shifts in AD

AD shifts because of a change in any of consumption, investment, government spending, exports or imports. This can be caused by changes in behaviour or changes in government policy.
- E.g changes in business confidence or taxation. If firms are more confident, they are more likely to borrow to finance investment. This shifts AD right and AD is now higher at every price level.

Demand 'shocks'

A demand-side shock is anything (positive or negative) that causes AD to change.
Examples of a negative shock could be an interest rate rise, a collapse in the housing market, etc.
As well as a fall in real GDP, this could have a knock-on effect on confidence, leading to further falls in activity.
The multiplier and accelerator effects could magnify the impact of any initial negative shock.
Keynesians may suggest government intervention would be required at this point.

Movements along the AD curve

Movements along the AD curve are caused by a change in the average price level (the two have an inverse relationship).
- E.g. a rise in the average price level leads to a contraction of AD.
The average price level can lead to several things:
- Real incomes: A rise in the average price level can lead to the real value of income to drop.
- Balance of trade: If the average price level of a foreign country fell, domestic consumers would demand more imports, causing a contraction in AD.
- Interest rates: If the average price level rises, there will be inflation.

Aggregate Demand (AD) - Consumption and Investment

Aggregate Demand (AD) is defined as the total value of planned expenditure on goods and services produced in an economy in a given period of time.

Components of AD

The formula for AD is AD = C + I + G + (X-M).
- C is Consumption.
- I is Investment.
- G is Government Spending.
- X is Exports.
- M is Imports.

Consumption

A number of factors affect the level of consumption (C):
- Wealth levels.
- Income levels.
- Future expectations of inflation.
- Animal spirits (confidence).
- Unemployment levels.
- Job security.

Types of investment

Investment is defined as expenditure that increases the capital stock of a country.
Investment in physical capital would be expenditure by firms on plant and machinery.
Investment in human capital is expenditure by firms on the skills of its workers e.g. training programmes.

Factors affecting investment

A number of factors affect the level of investment:
- Interest rates.
- Future growth and demand.
- Profitability.
- Government policies e.g. corporate tax, subsidies.
- Efficiency of financial system.

Types of government spending

Government spending could be on current spending or capital spending:
- Current spending is on transfer payments such as benefits, or on the day to day running of government e.g. salaries, utility bills.
- Capital spending is on long-term spending that increases the productive capacity of the economy e.g infrastructure projects.

Government spending

A number of factors affect the level of government spending:
- Cost of borrowing.
- Fiscal deficit or debt targets.
- Levels of national debt.
- State of the economy.
- Confidence in the economy.
- Political bias.

Exports and imports

A number of factors affect the level of exports and imports:
- The exchange rate determines relative prices of exports and imports.
- The quality of goods affects international competitiveness.
- Relative inflation rates affect domestic vs international prices.
- Relative levels of income. The higher the domestic income, the higher the marginal propensity to import.
- How much spare capacity there is to supply resources. The less there is, the more raw materials will need to be imported.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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