Transcript WOOHOO! finished first outcome (1a)

Micro and Macro- the difference?
Compared to microeconomics which examines
the level of economic activity in individual
markets for particular goods and services

Macroeconomics examines the general factors
affecting the overall level of economic activity
that results from the collective outcome of
production decisions.
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If we revisit the supply and demand graph, we
change from looking at individual markets to the
overall market.
We now call the demand curve the aggregate
demand curve (AD).
Aggregate Demand

The word “aggregate” simply means “total”. When we are looking
at “Aggregate Demand” we are looking at the total demand for
the entire Australian economy. As such we can no longer talk
about bread, water tanks or burgers; aggregate demand includes
EVERYTHING that we buy in this country.

Economists calculate aggregate demand by using the following
formula, (need to know this):
Aggregate Demand = C + I + G1 + G2 + (X – M)
These components can be broken down into:
Component
Definition
Sector
C – Consumption Spending
Any spending by households
Consumer
(such as food, household
Spending
appliances and so on)
I – Investment Spending
Any business investment in
plant and equipment
Business
Investment
Payments made by the
government on consumption
G1 – Government Consumption
items (such as wages for
administrative staff)
Government
Sector
Payments made by the
G2 – Government Investment
X – Exports
M - Imports
government on capital items
(such as new buildings or
roads)
Any good or service sold
from Australia to someone
overseas
Any good or service
purchased by someone in
this country from overseas
The External
Sector
Factors Affecting AD
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The AD curve can shift based on
prevailing conditions in the economy.
Factors which can influence AD
include:
1.
2.
3.
4.
5.
The level of income
The ability to borrow (interest rates)
Business and Consumer Confidence
Government policies
Conditions overseas
Factors Affecting AD (1)

An increase in the level of disposable
income will cause more to be demanded
at any given price.
Example: This could occur because of income
tax cuts, increases in the minimum wage or
increasing in government transfer payments.
AD curve would shift to the ___________
Factors Affecting AD (2)

The ability to borrow is affected both by
the cost of borrowing (interest rates) and
the willingness of financial institutions to
release funds.
Example: Low interest rates in recent years
have increased the demand for borrowed
funds. AD curve shift to the ________
Factors Affecting AD (3)

When confidence is high, consumers will
spend and businesses will invest.
Example: In times of uncertainty confidence
tends to drop (eg current times of recession
OR the period prior to the introduction of the
GST in 1999/2000). AD curve shift to the
________
Factors Affecting AD (4)
The government intervenes in the
Australian economy to influence the level
of AD in the pursuit of other goals.
Example: The government may use
expansionary policies such as a budget
deficit to generate economic activity. AD
curve shift _______
 OR tighter monetary policy to lower
inflation (general rise in price). AD curve
shifts ________
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Factors Affecting AD (5)

External conditions can also affect AD in
Australia, as around 11% of all Australian
production is sold overseas.

Example: include the global economic crisis
(simultaneous recessions in a number of
trading partners). Major trading partners such
as China and the US show economic growth
slowing. AD curve shifts __________
Class Exercise- AD Curve

For these examples, state which component is affected and draw
the AD curve and its respective shift and give reasons why :
 Governments impose a higher income tax
 Investment in businesses decrease
 Interests rates increases
 Government injects funds into the education system
 A drop in confidence in the sharemarket
Aggregate Supply

Aggregate Supply
refers to the total amount produced in an economy in a given
period of time.
Unlike aggregate demand, aggregate supply does not have a
convenient formula to help establish which factors will affect
it.
There are a few simple rules which we can use to help us
establish which factors will affect aggregate supply:
1.
2.
3.
Costs of production
Availability of resources
Efficiency
1. Cost of production
Any change to a cost of production will affect the
willingness of suppliers to produce output.
For example, a change in i______ rates, wages,
t__ rates or the c___ of raw materials can all
change the margin available to producers, and
as a result will affect the production levels.
2. Availability of resources
The way in which resources are allocated refers
to both how many resources we have and how
we use them.
The available resources include land, labour,
capital and enterprise.
Example: if the participation rate increases and
the labour resource becomes more available,
suppliers may use the opportunity to increase
their levels of production.
3. Efficiency
When productivity rates increase, the real cost per item
being produced will fall.
As a result, suppliers are once again able to make a
higher margin on each item that they sell, and so they
may be willing to allocate more of their resources to
the production of these items.
Example: Certain changes such as the introduction of
technology or increased levels of training will make the
cost per item fall. AS curve shifts ______________
Example….
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By using these rules as a guide, we can assess how
any factor will affect aggregate supply.
 Sample questions
Productivity rates in Australia have increased
 that will lead to a higher level of efficiency in the
Australian economy.
As a result,
 the real cost per item has fallen,
 and the profit margin available to producers has
increased.
 This means aggregate supply will probably ___?____,
which is represented by shifting the curve to the
__?__.
Factors Affecting AS
In very general terms, AS is affected by
the profitability of production, the cost of
production and the way in which
productive resources are allocated.
 It is important that you understand what
each of these things means, and be able
to provide some specific examples.

Class exercise- AS curve
For these examples, state which component is affected and
draw the AS curve and its respective shift and give reasons
why :
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a)
b)
c)
d)
e)
Interest rates (kept low recently)
Trade unions have secured wages increases for all workers
in the public sector
Government has invested in implementing a literary and
numeracy program that all secondary students must
undertake
Internet capabilities have made communication and
operation processes more efficient
Many local manufacturing companies are outsourcing their
labour to other countries
Linking everything together…
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The level of economic activity is a vital concept, as it represents
the combined levels of production, employment, expenditure and
income and fluctuations that affect the state of the economy.
For eg. A fall in the level of economic activity leads to
  levels of production and employment which leads to,
  levels of income and expenditure (consumption &
investment)
If a fall in economic activity is severe enough, problems such as
unemployment, low levels of growth and a state of economic
recession can develop.
These are issues you will need to be able to link together in order
to gain full marks in extended response questions.
You WILL need to know what SUPPLY SIDE POLICIES,
governments use to affect economic growth