Aggregate Supply
• Economic growth=increase in real GDP• Aggregate supply is the total quantity of
goods and services produced in the economy at that time.
Q: How does aggregate supply differ from supply in general?
Like the supply curves you studied in Chapter
5, it is determined, at least in part, by the desire
of firms to earn a profit. That is why the graph
shows output increasing as the price level
rises.
Aggregate Demand
• Aggregate demand is a term that describes the various quantities of goods and services that all people, taken together, are willing and able to buy at various price levels in a specific period of time.
• It represents all of the demand within the economy.
• Keep in mind that when economists speak of aggregate demand, they are referring to an average price level, not to the price of any single product.
• Among the factors that affect aggregate demand is a change in savings.
• If consumers save less and spend more, the increase in consumer spending increases aggregate demand.
• In much the same way, an increase in savings can result in a decrease in aggregate demand—leaving consumers with less money to spend.
Macroeconomic Equilibrium
• At any other level of output or price, the economy tends to be unstable.
• It is not likely to last, and eventually the economy will return to point Q.
• Macroeconomic equilibrium is the point at which aggregate supply balances aggregate demand.
• Think equilibrium price but on a national level.
Examining Economic Growth
• Real economic growth occurs when GDP increases faster than the population.
• The result is an improvement in the overall standard of living.
Have you ever ordered a
pizza only to have a couple
of hungry friends show up
unexpectedly?
GDP & Population Growth• Regression= pop. Growth but no GDP growth
• Stagnation= both increase at same rate
• GDP per capita (per person)= better measure of the effects of growth than Real GDP
Standard of Living
• The term standard of living refers to the overall quality of life.
• It is usually measured by real GDP per capita.
Comparing Standards of Living
Suburban community in Niger, Africa Suburban community in the United States
Sources of Economic Growth
Factors of Production• Natural Resources• Labor• Capital• Entrepreneurship
Productivity Gains• increases in the skills of
workers.• increases in the ratio of
capital to labor.• improved use of all
factors of production.• the development and use
of better equipment and products.
Sources of Economic Growth
Productivity Gains Come From
2. increases in the skills of workers.
3. increases in the ratio of capital to labor.
4. improved use of all factors of production.
5. the development and use of better equipment and products.
2. More productive workersEx: education/on-the-job training
3. Capital InvestmentEx: tools/equipment
4. ManagementEx: good decisions
5. Research & DevelopmentEx: improvements/inventions
Tools wear out
and depreciate
Capital
Investment: buy
new tools
Research &
Development:
Latest greatest
tools
Buy New,
Improved
Equipment:
often before old
ones wear out
R&D + Capital Investment = Economic Growth
Review: Terms to Know
• Aggregate Supply• Aggregate Demand• Macroeconomic Equilibrium• Economic Regression• Economic Stagnation• GDP per capita• Standard of Living• Research & Development
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