MACROECONOMIC

AGGREGATES
AGGREGATE-DEMAND
&
AGGREGATE-SUPPLY
BY :- SHIVPAL SINGHJ
(ITM, NAVI MUMBAI)
 INTRODUCTION TO
ECONOMICS
Economics is a study of social science.
Developed out of the broader field of political
economy owing to a desire to use an empirical
approach.
Aim to explain ―how‖ economics work and
economic agent ―interact‖.
Analysis is applied throughout society, business
finance and government, etc.
Contd….
 Expanding domain in the social science
has been described as ―economics
imperialism‖.
 Common distinctions are drawn between
various dimensions of economics.
 The textbook distinction are drawn
between micro and macro concepts.
 Defines as ―the science which studies
human behaviour as a relationship
between end users and means which
have alternative uses‖.
 ECONOMIC
S

MICROECONOMIC MACROECONOMIC
S S
 MICROECONOMICS
 Microeconomic examines the economic
behaviour of agents.
 Microeconomics focus on ―What‖ and
―For whom‖.
 Explores how various system of
incentives and way of making decisions
work.
 Provides the concept of economic
efficiency.
 Examines whether the production meet
the highest value and if not what change
 MACROECONOMICS
 Macroeconomics considers the performance
of a country as a whole.
 Deals with situation/condition with a long run
effect.
 We try to understand changes in-
rate of economics growth.
rate of inflation.
unemployment.
our trade performance with other
countries.
 Help to evaluate the relative success or
failure of government economic policies.
Macroeconomics
Macroeconomics is the study of aggregates
or averages covering the entire
economy, such as Total
Employment, National Income, National
Output, Total Investment, Total
Consumption, Total Savings, Aggregate
Demand, Aggregate Supply and General
price level, Wage level, and Cost structure.
 DIFFERENCE BETWEEN
MICROECONOMICS AND
MACROECONOMICS
MICROECONOMICS
1).Microeconomics is the study of
decisions that individuals make.
2).It focusses on supply and
demand and forces that determine
the price levels.
3).Company strategy is to
maximize profit and capacity to
compete in industry.
4).Microeconomics takes up a
bottoms-up approach to analyze
the economy.
MACROECONOMICS
1).Macroeconomics is the field of
economics that study the
behaviour of the company as a
whole.
2).It looks at economies wide
phenomenon such as GDP.
3).It looks at how an
increase/decrease in net profit
would effect a nation capital
account.
4).Macroeconomics takes a top-
down approach to analyze the
economy.
AGGREGATE-DEMAND
In economics aggregate demand is the
total demand for final goods and services
in the economy at a given time and price
level.

Aggregate demand is the gross domestic

product of a country when inventory levels
are static.
Aggregate Demand
 The sum of all expenditure in the economy over a
period of time
 Macro concept – WHOLE economy
 Formula:
AD = C+I+G+(X-M)
◦ C= Consumption Spending
◦ I = Investment Spending
◦ G = Government Spending
◦ (X-M) = difference between spending on imports
and receipts from exports (Balance of Payments)
Aggregate Demand –Key
Variables
 Consumption Expenditure
 Investment Expenditure
 Government Expenditure
 Import Spending
 Export Earning
Consumption Expenditure
 Exogenous factors affecting consumption:
◦ Tax rates
◦ Incomes – short term and expected income over lifetime
◦ Wage increases
◦ Credit
◦ Interest rates
◦ Wealth
 Property
 Shares
 Savings
 Bonds
Investment Expenditure
 Spending on:
◦ Machinery
◦ Equipment
◦ Buildings
◦ Infrastructure
 Influenced by:
◦ Expected rates of return
◦ Interest rates
◦ Expectations of future sales
◦ Expectations of future inflation rates
Government Spending
 Defence
 Health
 Social Welfare
 Education
 Foreign Aid
 Regions
 Industry
 Law and Order
Import Spending (negative)
 Goods and services bought from
abroad – represents an outflow of
funds from the country (reduces AD)
Export Earnings (Positive)
 Goods and services sold abroad –
represents a flow of funds into the
country (raises AD)
Aggregate Demand Curve
 The aggregate
demand (AD)
curve is a curve
that shows the
negative
relationship
between aggregate
output (income)
and the price level
Deriving the Aggregate Demand
Curve

 To derive the aggregate demand

curve, we examine what happens to
aggregate output (income) (Y) when
the price level (P) changes, assuming
no changes in government spending
(G), net taxes (T), or the monetary
policy variable (Ms).
Deriving the Aggregate Demand
Curve
 The AD curve is not
a market demand
curve, and it is not the
sum of all market
demand curves in the
economy. It is a more
complex concept.
Aggregate Demand Curve
 Aggregate demand falls when the price
level increases because the higher price level
causes the demand for money to rise, which
causes the interest rate to rise.
 It is the higher interest rate that causes
aggregate output to fall.
 At all points along the AD curve, both the
goods market and the money market are in
equilibrium.
Reasons why AD is downward
sloping
 The consumption link: The decrease in
consumption brought about by an increase
in the interest rate contributes to the overall
decrease in output.
 The real wealth effect, or real balance,
effect: When the price level rises, there is a
decrease in consumption brought about by
a change in real wealth.
Shifts in AD
 Changes in
Governmental
Policies
 Changes in Monetary
Policy
 Changes in
Expectations of
Households and
Firms
Factors that Effect Aggregate
Demand
 1. Income (+)
 2. Wealth (+)
 3. Population (+)
 4. Interest rates (–)
 5. Credit availability (+)
 6. Government demand (+)
 7. Taxation (–)
 8. Foreign demand (+)
 9. Investment (+)
 10. Expectations
(a) Inflationary (+)
(b) Income (+)
(c) Wealth (+)
(d) Interest rate (+)
AGGREGATE
SUPPLY
AGGREGATE
SUPPLY

Aggregate supply is the total

supply of goods and services
in an economy.
 AGGREGATE SUPPLY
CURVE
 Curve shows relation between
aggregate quantity of output supplied by
all the firms in an economy and overall
price level.
 It is not a market supply curve ,and it is
not simple sum of all individual supply
curves.
 Rather than an aggregate supply
curve, what does exist is a ―price/output
response‖ curve
AGGREGATE SUPPLY IN
THE SHORT RUN
In the short run, the
aggregate supply curve
(the price/output
response curve) has a
positive slope
AGGREGATE SUPPLY IN THE
SHORT RUN

Macroeconomists focus on whether or

not the economy as a whole is operating
at full capacity.
As the economy approaches maximum
capacity, firms respond to further
increases in demand only by raising
prices.
AGGREGATE SUPPLY IN THE
SHORT RUN
At low levels of
aggregate output the
curve is fairly flat.
As economy
approaches capacity, the
curve becomes nearly
vertical.
At capacity, the curve
is vertical.
The Response of Input Prices to
Changes in the Overall Price
Level
There must be a lag between
changes in input prices and changes
in output prices, otherwise the
aggregate supply (price/output
response) curve would be vertical.
Wage rates may increase at exactly
the same rate as the overall price level
if the price-level increase is fully
anticipated. Most input
prices, however, tend to lag increases
in output prices.
 WHY IS THE SHORT RUN
CURVE UPWARD SLOPING?
Short-run aggregate supply curve slopes
upward because:
 Contracts make some wages and
prices ―sticky.‖
 Firms are often slow to adjust wages.
 Menu costs make some prices sticky
 Shifts of the Short-Run
Aggregate Supply Curve

A decrease in aggregate An increase in aggregate

supply supply
 Shifts of the Short-Run
Aggregate Supply Curve
Factors That Shift the Aggregate Supply Curve
Shifts to the Right Shifts to the Left
Increases in Aggregate Supply Decreases in Aggregate Supply
Lower costs Higher costs
lower input prices higher input prices
lower wage rates higher wage rates
Economic growth Stagnation
more capital capital deterioration
more labor
technological change
Public policy Public policy
supply-side policies waste and inefficiency
tax cuts over-regulation
deregulation
Good weather Bad weather, natural
disasters, destruction
from wars
The Equilibrium Price Level
AD represents money
and goods market in
equilibrium.
AS represents
price/output decisions of
all firms in ecomony.
P0 and Y0 correspond to
equilibrium in the goods
market and the money
market and a set of
price/output decisions on
the part of all the firms in
the economy.
The Long-Run
Aggregate Supply Curve
Costs lag behind
price-level changes in
the short run, resulting
in an upward-sloping
AS curve.
 Costs and the price
level move in tandem
in the long run, and
the AS curve is
vertical.
The Long-Run
Aggregate Supply Curve
Output can be
pushed above
potential GDP by
higher aggregate
demand. The
aggregate price level
also rises.
The Long-Run
Aggregate Supply Curve
When output is
pushed above
potential, there is
upward pressure on
costs, and this causes
the short-run AS curve
to the left.
Costs ultimately
increase by the same
percentage as the
price level, and the
quantity supplied ends
up back at Y0.
The Long-Run
Aggregate Supply Curve
 Y0 represents
the level of
output that can
be sustained in
the long run
without
inflation. It is
also called
potential
output or
potential GDP.
Macroeconomic Model Building
 Model Building Overview
◦ Much of the work of economists is model
building.
◦ Models help to explain the relationship between
economic variables and help to answer why
economic problems or conditions occur.
◦ Model building consists of:
 Identifying variables
 Establishing assumptions
 Collecting and analyzing data
 Interpreting conclusions
 Classical Economics
◦ Popularly accepted theory prior to the Great
Depression of the 1930s.
◦ Says the economy will automatically adjust to
full employment.
 Classical economics is mainly based upon:
1. Barter economy
2. Supply creates its own demand in a macro
economy.
3. Wages and prices are flexible and increase or
decrease to ensure that the economy operates at
full employment.
4. Savings always equals investment, because
Keynesian Economics
◦ Based on the work of John Maynard Keynes, who
focused on the role of aggregate spending in
determining the level of macroeconomic activity.
◦ Introduced the idea that a macro economy seeks an
equilibrium output level.
Keynesian theories -
◦ The labour market
◦ The market for loanable funds (money market)
◦ The Multiplier
◦ Keynesian inflation theory
THE LABOUR MARKET –
•Keynes didn't have the same
confidence in the labour market as
Classical economists
• Wages would be 'sticky
downwards‗ ( mean that wages
would not necessarily fall enough
to clear the market and
unemployment would linger)
MARKET FOR LOANABLE FUNDS
(MONEY MARKET)
•Any increase in savings would mean
that people spent less. This would
mean a decrease in aggregate
demand
•Firms would be even less inclined to
invest because they would find the
demand for their products decreasing.
MULTIPLIER EFFECT-
ANY INCREASE IN DEMAND WOULD
LEAD TO MORE PEOPLE BEING
EMPLOYED
WOULD SPEND MORE
LEAD TO MORE EMPLOYEMENT
KEYNESIAN VIEW ON INFLATION
DEMAND-PULL INFLATION
-.As aggregate demand
grows so does the level of
output
• Full employment- leads to
inflation

COST-PUSH INFLATION
•Increased pressure on the
labour market (as nearly
everyone has a job)
•Rise in wages
•This in turn will cause costs
to increase.
KEYNESIAN POLICIES-
Reflationary policies

Reflationary policies
which boost the level of
economic activity might
include:
 Increasing the level of
government expenditure
 Cutting taxation (either
direct or indirect) to
encourage spending
 Cutting interest rates to
encourage saving
 Allowing some money
supply growth
KEYNESIAN POLICIES
Deflationary policies

Deflationary policies which

dampen down the level of
economic activity might
include:
• Reducing the level of
government expenditure
• Increasing taxation (either
direct or indirect) to
discourage spending
• Increasing interest rates to
discourage saving
• Reducing money supply
growth
AN EXAMPLE-
BIBLIOGRAPHY
 MACROECONOMICS –THEORY &
POLICY—H L AHUJA
 MACROECONOMICS—M L
JHINGAN
 PRINICPLES OF ECONOMICS—
PEARSON
 WIKIPEDIA
 WIKINOMICS.COM
THANK YOU