Aggregate Demand Vs Aggregate Supply

Macroeconomic problems are usually related to Aggregate Demand (Total Demand) and Aggregate Supply (Total Supply).
These problems usually occur when supply or demand are too high or too low. In order to combat this problem aggregate demand must be adjusted to to reach an equilibrium. [The equilibrium means the quantity supplied is the same as quantity demanded]

This Diagram shows a basic model of Aggregate supply and aggregate demand.

AD the Straight line pointing down is aggregate Demand, the long curved line pointing upwards is aggregate supply. Which is also the Maximum an economy is able to produce with it's current supplies.

The Price Level is the amount of inflation in an economy.


Aggregate Demand shows the Output of an economy which is Real GDP (Gross domestic production)

The above diagram is just the basic measurement of aggregate supply and aggregate demand.

Once I have mastered the drawing of this diagram I will move on to show the change in the economy using this diagram.

The economy is operating with a lot of resources.

This diagram shows the Increase in aggregate demand.
The line labeled AD is where the Aggregate demand was before, however AD1 shows the increase in demand which adds a small increase to inflation. This Shows the Price level rises because the demand has gone up. (fig P1) this is also known as Demand Pull Inflation. Though there is a small rise in inflation there is also a rise in Real GDP - Real Gross Domestic Production also known as Output. Which shows Economic Growth.


Firms operating at full use of 
Resources.

  

(AD1) This diagram shows an economy operating at full employment level. Also shows an increase in price, aggregate demand and inflation.

Why?

Because firms are operating at full use of there resources the price has gone up (Cost Push Inflation)
This means that firms must Import rather than Export which costs more money (X-M)

Which means there is a higher demand when operating at full employment.

Price Rises - Demand Rises - X-M (Exports minus Imports) Rise in Inflation = Less Economic Growth

                    Which means the economy suffers heavy inflation with a little economic growth.

Macro Economics - Formula

As earlier explained in my blog, Economics is the Study of an Economy. Macro-Economics is the study of the Economy as a whole.

Macro Economics are based on a Small formula based on Aggregate Demand.

AD = C + I + G + (X-M)

AD =  for Aggregate Demand

C = Consumption

I= Interest

G= Government Spending

X =  Export

M = Import (X-M = Exports minus Imports)
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The economy is based on Supply and Demand, Imagine a little corner store. With out supply they cannot make money or operate as a shop. With out demand they will not make money or sell anything. Which becomes a big problem to a business that wants to grow; when they are barely even surviving.

The Economy is the same way, It lives on Supply and Demand.

If the demand is higher than the Supply it could mean that prices could raise and the economy makes more money than it was when Demand and Supply where the same.

Production Possibility Curve

The above diagram is an economic production possibility curve. The Production Possibility curve shows the amount of products that can possibly be produced at that time. If both products use the same resources - Land, Plastic, Metal. Economists must construct the above diagram to measure the possible volume of production.

Let’s say that - Vertical side is Computers & the Horizontal line is cooling fans.



If you look at the line that starts right by the letter A - & matches straight up to Letter E - you should see a square shape that states - OA to OE - that is the volume of production for Computers. If you go straight from OD - OB you can see the volume of production for Cooling fans - Make sense?

Next we will move onto What happens when you change the level of production on the diagram - For instance - OD - OE - what would we gain & what would we lose?

Measurement of Macro-Economy

Macro Economic Performance -

The Government set objectives for its economy, Macroeconomic performance measures how well an economy is doing with its set objects. Unlike Micro Economics, it is not based on the living standards for the majority of that population. The main aim for the policy is usually an improvement in the real standard of living.
The term real means, we have taken into account the effects of rising Prices so that we can measure how many goods and services we can afford to buy.

If we Zoom out of standard living look at the bigger picture, in real standard living we will see the following questions arise between economists.

1. Jobs - Are more people finding work in the jobs that they are suited to and which pay a living wage? how high is unemployment? is the economy creating enough jobs for people entering the labour market each year?

2. Prices - Are price rises under control creating the conditions for price stability

3.Trade - Is the economy performing well in trading goods with other countries? Is the economy living within its means by exporting enough to pay for imported producers?

4. Growth - how successful has the economy been in achieving growth in the short term and in laying the foundations for expansion in the future?  

5. Public services - have the benefits of growth flowed through the greater and improved provision of key public services such as education, health & transport?

6. The environmental - the effects of economic activity on our natural built environment become evermore important over the years? - Many economists now focus on whether expanding economy is sustainable in terms of it's environmental impact

These questions pop up in government meetings and in newspapers every day - "EXPAND EXPAND, there is a decline in growth due to inflation.. or - we have a vast improvement in economic growth compared to last year & next year the economy can grow even bigger by 3%" - "but won't that be to big for our natural environment & cause problems, such as over population?"



 - I need a coffee break.. this blogging on studies & expansion, inflation needs some new found meditation.. - Until next time!!

Shaun Michael.

Macro-Economics

Micro-Economics study the specific economy, however macroeconomics is the study of the economy as a whole. Make sense? So for example the study of the UK economy would be Micro-Economics.

Any way moving on, Macroeconomics as well as studying the whole economy, we also look at the relationship between one country and another, including the success and failure of government policies.

What are the main sectors of Macro-economy?

As stated before Micro-economy studies individual markets, where as micro economy studies everything as a whole, here are the main sectors of Macro-Economy

• Households - Households receive income from their jobs and investments. Households buy output (products) from their firms (business ie, sainsburys) This is known as consumption or consumer spending and labeled as (c)
• Firms - Firms are businesses that hire land, labor and capital inputs to produce goods and services for which they pay wages and rent (household income). Firms receive payment from consumers (you) and profitable businesses may choose to invest (labeled as I) a percentage of profits in a producers goods (ie Sainsburys)
• Government - The government collect direct and indirect tax (T) to fund spending such as, healthcare, education, travel & defense.
• International sector - The Uk buy overseas products known as imports (M) and overseas consumers and business buy UK products - known as exports (x). International trade is really important as millions of jobs rely directly or indirectly on the UK remaining competitive in the market. If the industry where to fall jobs would be scarce & this would inflate the economy all over the world. 

Economic Systems

Today I my tutor has set for me to study economic systems, I first thought it would be boring.. but who doesn't have an interest in money? Better yet.. How things work?
So what is an economic system? An economic system is best described as a network of organisations used by a society to resolve the basic problems of what, how much and for whom to produce for.


Okay so we'll take a close look

1. Traditional economy 
The keyword is custom tradition. Custom tradition as an economic system is based off of the laws and economy of ancient lands, where capitalism has no effect of communities. For instance in the Asian Pacific, their ways of trading are completely different to western ways. They trade pig tusks and large rocks for goods or services. As a matter of a fact they have banks, who accept such rare items. The value is calculated by the weight of each item. In this economy they have NEVER had a bank robbery or such crimes. Though far behind they're economy is not based on capital.



2. Free Market Economy 
A free market economy is solely on the basis of buyers and sellers. The amount of products produced depends on the demand and the amount of products consumed and the amount of products consumed depends on the the household income of the public sector. The government limit themselves to protecting the property rights of people and business.

3. Planned or Command Economy
One word - COMMUNISTS! in a planned or commanded economy it is usually associated with socialist or communists, the state will ration resources, and all resources are owned by the state (I.E government - IE communists) according to its view. In this system the market has no say or control over rations or queing over scarce goods.

The definition of communists - Communist was first mentioned by Friedrich Engels & Karl Marx in the communist manifesto. Communism is a political party that set and enforce the following laws and more.

• Every man is equal (apart from the state)
• Resources and wealth are owned by and belong to the government
• The public sector are not able to exclusively or privately own anything.

4. Mixed Economy

A mixed economy and resources are owned by the government and some resources are owned by the private sector. The public or state sector sometimes intervenes in markets to correct perceived market failure

Economics & Opportunity Costs

As promised I would progress further research & show further information on Opportunity Costs.

Every day we as people & even children make decisions. "Should I go to school to day, or should I use the spare time, to associate with my on-line friends on Facebook?". Another example is you can buy one can of RedBull for £1.50, knowing you have £5 on your person. However there is a Tesco branded drink that tastes a little different but has the exact same effects & chemicals of RedBull & this sells at 35 pence a can. The opportunity cost is you can buy 1 product that does the exact same thing for %23.3 less. What would you do?

In all fairness spending £1,50 will leave you with £3.50 for a good tasting drink that will give you energy. However I find energy drinks as high interest energy loans. Energy drinks will give you %50 energy but would want a repayment of %100 energy. Therefore because you don't want to feel dire exhaustion you replenish your supply of artificial energy. If you but another RedBull at 11:00, you are left with £2.00 which theoretically would dehydrate your body by 2 pm. Leaving your body needing another energy drink. If you went with Tesco's energy drink at 35 pence a can, You would have enough money to buy artificial energy through out the day. The opportunity cost is the best available decision that makes good use of our money & time

Watch this video for further understanding.