Aggregate Supply and Demand

Lesson Overview

• This lesson focuses on aggregate supply and demand.
• The lecture covers the characteristics of macroeconomic fluctuations, their short-term causes, and aggregate supply and demand curves.

Final Exam Information

• The final exam is cumulative
• It is scheduled for Tuesday, April 22, 2025
• The exam will take place from 19:00 to 22:00 (3 hours)
• It will consist of 100 multiple-choice questions
• The location is 125 University MNT 202-203
• It will be administered on Brightspace under the "Questionnaire" section

Important Notes

• Chapter 14 of the textbook is covered in Lesson 9
• Selected elements of Chapter 12 will be reprised
• Only Chapter 12 elements discussed in class will be on the exam
• Chapters 12 and 13 of the manual will not be covered and therefore won't be on the final exam

Course Objectives

• Identification of the three principal characteristics of the short-term economic fluctuations
• Elucidation of the distinction between short-term and long-term economies
• Utilization of an aggregate supply and demand model in order to explain economic fluctuations
• Understanding the relationship between expansion, recession phases, and aggregate supply/demand variations

Short-Term Economic Fluctuations

• Economic activity fluctuates from one period to another
• Production usually increases through technological advances, investment, and labor force growth
• Production slowdowns can lead to recessions

Recessions and Depressions

• A recession is when real GDP declines for two consecutive quarters
• During a recession, income decreases and unemployment increases
• A depression represents a severe recession

Fluctuations at Short Term

• Two questions arise with the economic fluctuations at the short term
• What's the origin/cause of economic fluctuations?
• Can we avoid or reduce the impacts of these fluctuations?
• Studied variables remain the same while the time horizon changes from long to short duration

Characteristics of Economic Fluctuations

• Economic fluctuations are irregular and unpredictable
• Recessions occur with an unforeseeable frequency and duration
• Most macroeconomic variables move together
• When production decreases, unemployment increases, showing a inverse correlation between real GDP variations and unemployment

Short run and long run

• Until now, economic interactions analysis is based on the classical dichotomy
• The classical dichotomy dissociates real and nominal variables
• It is stipulated that variations of money supply solely influences nominal variables, without influence on real variables
• Long term analysis permits to analyze determinents of real variables without reference to nominal variables (money supply, level of prices)

Monetary Neutrality

• Most economists agree that the quantitative theory of money accurately describes the economic world long term
• Monetary neutrality is unacceptable when analyzing annual fluctuations because real and nominal variables cannot be separated
• This idea leads to a global supply-demand model

Aggregate Supply and Demand Model

• Developed in order to measure the variation of prices based on offered and requested quantities
• Aggregate supply represents the total supply within a territory
• Aggregate demand represents the total demand within a territory

Long-Term Supply and Money

• Real variables determine the trends in long term instead of money effects
• Long-term supply variation does not depend of the price variation following the neutrality long term hypothesis

Long-Run Aggregate Supply Curve (OALT)

• The curve indicates the quantity of goods and services produced and sold by firms at each price level
• Production depends on available production factors, technology, and institutions, the global supply curve is vertical
• Companies operate at full capacity
• Real GDP equals potential GDP, and unemployment occurs at its natural level
• The level of long-term production is called production potential, full-employment, and natural level

Shifts in the Long-Run Aggregate Supply Curve (OALT)

• Changes in production capabilities, labor, natural resources, capital stock, and technology shift the OALT curve
• Variations to the factors cause a parallel shift of the global offer at long term
• Production is reliant on factors of production, technology and institutions

Factors Causing Curve Shifts

• Immigration increases labor, shifting OALT to the right
• Increased unemployment from minimum wage laws reduces labor, shifting OALT to the left.
• Better unemployment benefits increase labor, shifting OALT to the right
• Increased innovation and technology shift OALT to the right

Short Term vs Long Term

• The fundamental difference resides in in the behavior of the global offer and the global demand

• Short term is characterized by a positive slope for the global offer curve

• A rise in prices pushes supply upward, while a price decline pushes it downward.

• This relies on market imperfections causing distinct behaviors in short versus long-term

• Production quantity deviates from its long-term level when the general price varies from what people expect

0ACT Positive Slope

• Production costs must adapt immediately to price decreases for quantities produced
• Because of this, that adaptation fails to occur in the short-term

Aggregate Offer

• Short-term, general price increases in economy tends to increases the offer, but price decreases lead to a inverse effect
• Production volume exceeds long time if prices are higher than expectations and reverse
• Salaries are rigid which means they slowly adjust and lead to a reduction on production profitability
• Lower offer reduces positions plus production

Short Term

• Adjustments to the prices happens quick
• Rigidity to nominal wealth

Factors Shifting Global Offer

• This occurs at short duration only
• Production costs
• Variations of productivity
• Variation to the legal or institutional framework

Aggregate Demand

• It's the volume of products plus services sought by households
• Level of prices affects supply and demand

Negatively Sloped Demand

• Is sensitive to price variations

Elements Impacted

• Customer demand
• Investments
• Import and Exports

Consumption and The Wealth

• Wealth affect the increase and decrease in prices

Invesments

• It will go down if the family has less

Net Exportations

• Prices effect that for global

Factors of Displacement of The Curve

• Consumers
• Investments
• Public funds
• Net exportations

Key points in Questions

• A wave of change or economic policy
• Investment from external sources
• A boom in shares
• The tax rules
• Other countries economic rules
• Fluctuation between the countries

Aggregate Supply Curve

• It shows us the volume for the wealth of each client for how they pay their services
• Short term it has a positive
• Long term will be vertical

Displacement of the OACT

• Is rigid cause they are non anticipated prices this results in people being released form and to reduce the service amount If it will move it's because of
• Man power related because staff leave
• Capital, it means the amount human force will impact
• A advancement in the resources so it means what the people need for their life
• Technology will effect for better or for woser
• Price increase leads to a decrease
• A good decrease leads to a opposite effect

Term offer Curve

• We need have a vision for a short period on what we plan to charge people
• The prices need to vary

Model Term Curve

• Balance that for services it needs to have level of money
• Goods with the government is more important

Equilibrium Term Curve

• That term curve at a short time its always more important and they work together
• Its needs of both needs at the same level

Short and Long Term Curve

• Is equal at intersection point between and DA and OA
• When they find a equilibrium that adjusts that term curve can pass to short term curve equally

The Long Runs Wealth

• Is where inflation come from

Récession Causes

• Diminution of the of global request/demand
• Diminution of the wealth globally

Effects from Economy

• Transfer wealth to other countries
• Lower jobs at minimum
• Increase value of natural material

Stimulation Economy

• More wealth
• Money to all for more consumption
• Economy return to their natural level
• Stimulate by monetary and economic changes

Résumé

• Decrease the inflation to make it to normal rate
• Need to find where the point on that 2 graphs of all we speak before

Additional Exercises

• Reading Chapter 14 of the manual, pages 339-373
• Working through exercises on pages 177-189 of the guide