ECO3041 - Ch 11 AS and AD

ECO3041 - Ch 11 AS and AD - Department of Economics, FIU...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Economics, FIU Chapter 11 Notes Prof. Dacal
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 11 Notes Chapter 11 Aggregate Supply and Demand I. A Macroeconomics view Macroeconomics is the study of aggregate economic behavior, of the economy as a whole. These basic macroeconomic outcomes include: Output: total volume of goods, Jobs: level of employment , Prices: average price, Growth: year to year expansions, and International balances: international value of the dollar, trade and payment balance. Macroeconomic Determinants These determinants of macro performance include: International market forces (e.g. population growth, spending behavior, invention, and innovation) External shocks (e.g. wars, natural disasters, and trade disruption) Policy levers (e.g. tax policy, government spending, regulation, and changes in money supply. II. Stable or unstable? The central concern of macroeconomic theory is whether the internal forces of the marketplace will generate desired outcome. 2 | P a g e
Background image of page 2
Chapter 11 Notes Classical theory The classical model assumes: Unemployment is zero, for every job destroyed there is one created, No government intervention is needed, All workers are homogeneous, and Prices adjust immediately. The Classical approach builds on “the invisible hand” 1 of the market. It also assumes the prices will adjust to equilibrium fairly quickly. In general, it disapproves of government intervention. Self adjustment According to the classical model the economy self-adjust to deviation from its long-term growth trends. Flexible prices Prices adjust immediately. If market prices are too high, inventories will increase and firms will be force to lower prices. Flexible wages Most importantly, wages adjust quickly. 1. If individuals temporarily loss their jobs, they would compete for jobs by offering their services at lower wages. 2. As wage rates decline, producers would find it profitable to hire more workers. 3. Finally, flexible wages would endure that everyone who wanted a job would have a job. 1 (Smith, 1776) 3 | P a g e
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 11 Notes Say’s Law Say’s law states that supply creates is own demand. Once you find the right price for your product it will sell. Side note: I have a certain problem with this law. How low must you go to sell a useless unwanted product? If zero is an acceptable number, then I do agree with this law. However at one cent, I am already skeptical of this law at least from an empirical view.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/22/2012 for the course ECO 3041 taught by Professor Dacal during the Fall '11 term at FIU.

Page1 / 10

ECO3041 - Ch 11 AS and AD - Department of Economics, FIU...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online