DO NOW:

GROUP DISCUSSION

INSTRUCTIONS:
• Explain to your table group which
alternative measure you investigated and
how it measures well-being.
• Discuss whether or not these are more
effective methods of determining the
following in a national economy:
• Value
• Economic activity
• Economic well-being
• Standard of living
 3.2 Variations in economic activity—aggregate
LESSON 1: AGGREGATE demand
DEMAND and aggregate supply

Learning Objectives
• Be able to describe aggregate
demand (AD) and model its curve
• Be able to list the components of
AD
• Be able to list determinants of AD
and explain how they shift the AD
curve
 HOMEWORK

• Complete fact sheet

DUE DATE: Today.

 WHAT IS AGGREGATE
DEMAND?

INSTRUCTIONS: Copy the key term.

Aggregate Demand – the total

quantity of goods and services that
all buyers in an economy
(consumers, firms, governments and
foreigners) want to buy over a
particular time period, at different
possible price levels, ceteris paribus.
 HOW DO WE MEASURE
ECONOMIC ACTIVITY?

INSTRUCTIONS: Discuss which of these methods

of calculating economic activity would be the best
representation of aggregate demand?

Expenditure Approach
Adds up all spending to buy final goods and
services produced within a country over a time
period
Output Approach Income Approach
Calculates the value of all final goods and Adds up all income earned by the factors of
services produced in a country over a time period. production that produce all goods and services
within a country over a time period.
 WHAT ARE THE COMPONENTS OF
AGGREGATE DEMAND?

INSTRUCTIONS: List the components of aggregate demand and how it is

calculated.

Consumption (C) Investment (I)

Includes all purchases by Spending by firms on capital
households on final goods goods, such as buildings,
and services. machinery, equipment.

Government Spending (G) Net Exports (X-M)

Includes all purchases by Value of all exports
governments on final goods minus the value of all
and services. imports.

Aggregate Demand = C + I + G + (X-M)

 THE DEMAND CURVE
(MICROECONOMICS)

Pringles INSTRUCTIONS: Recall the factors underlying the

demand curve (HL ONLY).

1. Income Effect – as price of good decreases, the

quantity demanded increases because consumers
have more income to spend.
2. Substitution Effect – As price of good decreases,
consumers may switch from other substitute goods
to this good.
3. Law of Diminishing Marginal Utility – As we
consume more units, the satisfaction we derive for
each additional unit diminishes.
 1. Wealth Effect – (value of assets, such as houses,
Aggregate Demand Curve stocks, real estate) if the price level increases, the
real value of wealth falls and people feel worse off
INSTRUCTIONS: Model the AD curve and cut back on spending.
and explain what factors might underly the 2. Interest Rate Effect – (changes in price level affect
relationship between price level and real
GDP. rates of interest, which affects AD). If increase in
the price level, consumers & firms need more
money to for purchases, which increases the
demand for money. As interest rates rise, the cost of
borrowing increases leading to a decrease in
consumer purchases.
3. International Trade Effect – if domestic price
level increases while price levels in other countries
remain the same, exports become more expensive to
foreign buyers who will demand less, while good
The AD curve shows the relationship
between the aggregate output buyers want
from other countries will be relatively cheaper, so
to buy and the economy’s price level. domestic consumers increase their purchases.
 AGGREGATE DEMAND CURVE

INSTRUCTIONS: Summarise the difference between

movements and shifts of the AD curve.

Movement along the AD Curve

Price level changes result in movement along the AD
curve (the output that buyers in an economy want to
purchase at different price levels).

Shifts of the AD Curve

Caused by the determinants of aggregate demand:
• Rightward shift means AD increases for any price
level
• Leftward shift means AD decreases for any price level
 The determinants of aggregate demand (Consumers)

Consumer Measure of how optimistic • If more confident – AD

Confidence consumers are about their future shifts to the right
income and the future of the
economy • If less confident – AD
shifts to the left.

Interest Rates Some consumer spending is • If interest rate falls – AD

financed by borrowing, so is shifts to the right
influenced by rate changes
• If interest rate rise – AD
shifts to the left.

Wealth Value of assets that people own, • If wealth increases – AD

including their houses, stocks and shifts to the right
bonds, jewellery (aka bling), and
works of art. • If wealth decreases – AD
shifts to the left.
 The determinants of aggregate demand (Consumers)

Personal Taxes paid by households on their • If taxes are lowered – AD

Income Taxes incomes. shifts to the right

• If taxes are raised – AD

shifts to the left.

Household How much money people owe • If a low level of debt – AD

Indebtedness from taking out loans in the past. shifts to the right

• If a high level of debt – AD

shifts to the left.
 The determinants of aggregate demand (Investment)
Business Measure of how optimistic firms • If more confident – AD
Confidence are about their future sales and shifts to the right
economic activity.
• If less confident – AD
shifts to the left.

Interest Rates Cost of borrowing for firms. • If interest rate falls – AD

shifts to the right

• If interest rate rise – AD

shifts to the left.

Improvements New and improved technology • If new technologies are

in Technology stimulates investment spending. introduced – AD shifts to
the right
 The determinants of aggregate demand (Investment)
Business Taxes The amount that the government • If taxes decrease – AD
taxes the profits of businesses. shifts to the right

• If taxes increase – AD
shifts to the left.

Corporate The amount of debt by • If the amount of debt

Indebtedness businesses. decreases – AD shifts to the
right

• If the amount of debt

increases – AD shifts to the
left.

Legal/ The business environment in • If environment improves –

Institutional which the firm operates, such as AD shifts to the right
access to credit, legal rights, and
property rights. • If environment worsens –
AD shifts to the left.
 The determinants of aggregate demand (Government)
Political Government spending on merit • If more spending – AD
Priorities goods, public goods, subsidies, shifts to the right
T H E Dpensions,
E T E R MIwages,
NANT etc…
S O F A G G R E G AT E D E MA N D
( G O V E RN ME N T )• If less spending – AD
shifts to the left.

Economic Similar to above – the level of • If more spending – AD

Priorities government expenditures. shifts to the right

• If less spending – AD
shifts to the left.
 The determinants of aggregate demand (Export-Import)

National The level of income of a trading • If more income – AD shifts

Income Abroad partner can influence demand in to the right
the home country.
• If less income – AD shifts
to the left.

Exchange The price of one country’s • If price of currency

Rates currency in terms of another decreases – AD shifts to
country’s currency. the right

• If price of currency
increases – AD shifts to
the left.

Trade Protection The restrictions to free • If restrictions are lowered

international trade often – AD shifts to the right
imposed by governments.
• If restrictions are increased
– AD shifts to the left
 HOMEWORK

• Complete aggregate demand research

task.

DUE DATE: Monday, Week 3.

 SUMMARY

INSTRUCTIONS: As a class, discuss

the questions below.

1. What are the similarities and

differences between demand and
AD?