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Chapter 12 Terms Aggregate Demand and Aggregate Supply Flashcards

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❶The money supply may be a vertical supply curve, if the central bank of a country chooses to use monetary policy to fix its value regardless of the interest rate; in this case the money supply is totally inelastic. According to Hamid S.




Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods an inferior but staple good and Veblen goods goods made more fashionable by a higher price.

By its very nature, conceptualizing a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser has no influence over the market price. This is true because each point on the demand curve is the answer to the question "If this buyer is faced with this potential price, how much of the product will it purchase?

Like with supply curves, economists distinguish between the demand curve of an individual and the market demand curve. The market demand curve is obtained by summing the quantities demanded by all consumers at each potential price. Thus, in the graph of the demand curve, individuals' demand curves are added horizontally to obtain the market demand curve.

Generally speaking, an equilibrium is defined to be the price-quantity pair where the quantity demanded is equal to the quantity supplied. It is represented by the intersection of the demand and supply curves. A situation in a market when the price is such that the quantity demanded by consumers is correctly balanced by the quantity that firms wish to supply. In this situation, the market clears. Changes in market equilibrium: Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves.

Comparative statics of such a shift traces the effects from the initial equilibrium to the new equilibrium. When consumers increase the quantity demanded at a given price , it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2.

In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. A movements along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. The increase in demand could also come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers.

This would cause the entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point Q 1 , P 1 to the point Q 2 , P 2. If the demand decreases , then the opposite happens: If the demand starts at D2 , and decreases to D1 , the equilibrium price will decrease, and the equilibrium quantity will also decrease.

The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change shift in demand. When technological progress occurs, the supply curve shifts. For example, assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases.

Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward, to S2 —an increase in supply. This increase in supply causes the equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as consumers move along the demand curve to the new lower price. As a result of a supply curve shift, the price and the quantity move in opposite directions.

If the quantity supplied decreases , the opposite happens. If the supply curve starts at S2 , and shifts leftward to S1 , the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. The quantity demanded at each price is the same as before the supply shift, reflecting the fact that the demand curve has not shifted.

But due to the change shift in supply, the equilibrium quantity and price have changed. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept, the constant term of the supply equation.

The supply curve shifts up and down the y axis as non-price determinants of demand change. Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes attributed to George Stigler: The supply-and-demand model is a partial equilibrium model of economic equilibrium , where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets.

In other words, the prices of all substitutes and complements , as well as income levels of consumers are constant. This makes analysis much simpler than in a general equilibrium model which includes an entire economy. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium , efficiency and comparative statics.

The stringency of the simplifying assumptions inherent in this approach make the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real world economic phenomena.

Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any.

The model is commonly applied to wages , in the market for labor. The typical roles of supplier and demander are reversed. The suppliers are individuals, who try to sell their labor for the highest price. The demanders of labor are businesses, which try to buy the type of labor they need at the lowest price. The equilibrium price for a certain type of labor is the wage rate. In both classical and Keynesian economics, the money market is analyzed as a supply-and-demand system with interest rates being the price.

The money supply may be a vertical supply curve, if the central bank of a country chooses to use monetary policy to fix its value regardless of the interest rate; in this case the money supply is totally inelastic. On the other hand, [8] the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply; in this case the money supply curve is perfectly elastic.

The demand for money intersects with the money supply to determine the interest rate. Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model.

This can be done with simultaneous-equation methods of estimation in econometrics. Such methods allow solving for the model-relevant "structural coefficients," the estimated algebraic counterparts of the theory. The Parameter identification problem is a common issue in "structural estimation. An alternative to "structural estimation" is reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables.

Demand and supply have also been generalized to explain macroeconomic variables in a market economy , including the quantity of total output and the general price level. The aggregate demand-aggregate supply model may be the most direct application of supply and demand to macroeconomics, but other macroeconomic models also use supply and demand.

Compared to microeconomic uses of demand and supply, different and more controversial theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. Demand and supply are also used in macroeconomic theory to relate money supply and money demand to interest rates , and to relate labor supply and labor demand to wage rates.

The th couplet of Tirukkural , which was composed at least years ago, says that "if people do not consume a product or service, then there will not be anybody to supply that product or service for the sake of price".

According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim scholars, such as fourteenth-century Syrian scholar Ibn Taymiyyah , who wrote: On the other hand, if availability of the good increases and the desire for it decreases, the price comes down.

In this description demand is rent: The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy , published in In The Wealth of Nations , Smith generally assumed that the supply price was fixed but that its "merit" value would decrease as its "scarcity" increased, in effect what was later called the law of demand also.

For example, when farmers anticipate that the price of the crop will increase. This will cause them to withhold the produce to benefit from a higher price. This, in turn, reduces the supply and in the context of manufacturers when there is an expected increase in price then they will employ more resources to increase the output.

An increase in the prices of the inputs will increase production costs. This will, in turn, shrink the profits. Since profit is a major incentive the producers supplying goods and services to a certain market will increase, the production of service or product when there is low production costs and vice versa. An increase in the price of the inputs will reduce the supply of the commodity, the supply curve will shift leftwards, and a decrease in the price of inputs the price increases and the supply curve will shift rightwards.

Companies which manufacture related products, such as detergents, will shift their production to a particular product if that product is manufactured in large quantities. It increases the price, and there will be a reduction in supply. An example is a firm that produces soccer balls and basketballs, when the price of soccer balls increases the firm will produce more soccer balls and less of basket balls, this means that the supply of basketballs will reduce.

High taxes reduce profits because the suppliers will have to pay huge bills to cater for their production. Subsidies, on the other hand, reduces the cost of production, and the suppliers can gain profits by selling the product or service. An increase in subsidies will increase supply and a decrease in subsidies will decrease supply in the same manner.

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So what are the determinants of supply?


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If producers expect prices to increase, supply will increase. Expect prices to decrease, and supply will decrease.

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Supply for a good is said to be _____ if the quantity supplied responds only slightly to changes in the price. For each determinant of demand, explain how the demand curve can shift both to the right and to the left PRICE-The law of demand states that when prices rise, the quantity demanded falls. This also means that, when prices drop, demand will rise.

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The determinants of supply are any factors other than the product's price that have effect on the supply of a good or service and cause the supply curve to shifts. The demand curve shows the quantities of a product that will be purchased at various possible prices, other things equal. Learn supply and demand supply demand determinants with free interactive flashcards. Choose from different sets of supply and demand supply demand determinants flashcards on Quizlet.