Lesson_05_-_Chap_10 -...

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Lesson 5 Lesson 5 Long Run Aggregate Supply and Demand In the first part of this course you learned about the most fundamental and powerful of the tools of economic analysis: supply and demand. The tools yo have learned about apply to markets for individual goods and services. It is now time to see if we can adapt these potent tools to the analysis of the economy as a whole. Many of the features of the supply and demand analysis of individual markets carry over when we use supply and demand concepts to analyze the macro-economy. On the other hand, we must be very careful to remember that supply and demand concepts that we apply to the aggregate economy are different from the supply and demand concepts that we apply to individual markets in some fundamental ways. We call supply and demand concepts applied to the economy as a whole aggregate supply and aggregate demand to remind ourselves of these fundamental differences. What will we learn in this lesson? When you are done with this lesson, you should be able to: Explain the long run aggregate supply relationship; relate it to the production possibility curve, and explain factors that shift long run aggregate supply. 1. Explain the aggregate demand relationship, the reasons for the downward slope of the aggregated demand curve, and explain factors that shift aggregate demand. 2. Put the two curves together to understand how an economy moves to an equilibrium output and price level, and illustrate some of the economics objectives explained earlier. 3. Questions? If you have any questions, please post them to our I Don't Understand discussion forum (not e-mail), located under the Communicate or the Lesson tab in ANGEL. Your instructor will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you are able to help out another student. Lesson 5 Long Run Aggregate Supply As we begin to develop the aggregate demand and supply tools, think back to the supply and demand analysis that you learned in Unit 2. There, demand referred to a relationship between the price of a particular good and the total quantity of the good that all of the buyers in the market were willing and able to buy. When we look at the economy as a whole, we are looking not at a particular good or service, but at all of the goods and services combined You learned in the last unit that the measure of all of the final goods and services combined is called real GDP , and you learned how that measure is calculated from data about the quantities of individual goods and services. This value will go on the horizontal axis, replacing quantity from the ?regular? supply and demand curve model. You also learned in Unit 3 that there is an aggregate analogue to the price of an individual good or service. That analogue is the price level , which is a weighted average of the prices of all of the individual goods and services. You probably recall from Unit 3 that economists use many different price indices as measures of the price level; for example, the GDP price index (sometimes called the GDP deflator) and the consumer price index. The
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This note was uploaded on 10/08/2010 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Summer '08 term at Pennsylvania State University, University Park.

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Lesson_05_-_Chap_10 -...

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