Aggregate Demand

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Aggregate demand and aggregate supply--Aggregate demand curve is a curve that shows the quantity of goods and services that households (C), firms (I), Government (G), and customers abroad (Exports-Imports) want to buy at each price level. Aggregate demand slopes downward because: Wealth Effect, Interest rate effect, Exchange rate effect. Shift in Aggregate Demand (AD). AD increases in (shifts to the right) when Consumption, Investment, Government spending, or Net Exports increase. Aggregate supply curve is a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Sticky wage theory: Nominal wages may increase at the expected rate of inflation. Sticky price theory: Some prices adjust slowly because of menu costs. What shifts the long run supply will shift the short run supply curve plus sellers price expectations. An increase in the expected price level decreases the short run supply curve since firms and workers are likely to agree to higher wage increases which raises the cost of production. Long run equilibrium is where all three curves (AD, LRAS and SRAS) cross. Comparative Advantage-- economics is the study of scarcity (can’t get all for free, have to make choices, resources [land, labor, capital, entrepreneurship] are limited) and choice (decide what to do and not do). Comparative advantage means that an individual or country can produce at a lower opportunity cost than another producer-When individuals and countries specialize in their comparative advantage and trade, they can consume beyond their production possibilities frontiers. Perfect competition, Costs--Short run-Time before firms have enough time to enter or exit an industry. Long run-Firms have enough time to exit or leave an industry. Economic profit=total revenue-(explicit costs+implicit costs). Total revenue=price times quantity. Total costs include both explicit costs [costs that require a money expenditure such as wages and rent] and implicit costs [costs that
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