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REVIEW: With your partner answer the following questions… 1) What is the difference between Micro & Macro Economics? 2) What is ‘Supply’? 3) Whose perspective is it from? 4) What are the 3 Determinants of Supply? 5) Does the ‘Supply’ we’ve studied so far demonstrate a Micro or Macro example of economics? Use the dictionary and textbook (p. 344) to define the following • • • • • • • Aggregate Aggregate Output (AO) Price Level (PL) Aggregate Demand (AD) Aggregate Demand Curve Aggregate Supply (AS) Aggregate Supply Curve Aggregate • collection of items that are gathered together to form a total quantity. It may refer also to: Aggregate Output • Total amount of goods and services in the economy during a given period = same as Real GDP = same as Output/Employment (O/E) Price Level • Average price of aggregate output • = supply & demand of the total measure of output Aggregate Demand • Sums up the demands of households, firms, government and the rest of the world Aggregate Demand Curve • The total output of the economy and PL are determined at the intersection of the AD & AS curves. • The equilibrium reflects Real GDP and the PL Aggregate Supply • How much output U.S. producers are willing and able to sell at each price level • Inverse relationship => As PL goes up, O/E goes down and vice versa. Aggregate Supply Curve {Also called “Output to Employment” [O/E]} Starting Point of AS: PL AS A PL1 AD O/E1 O/E Increase in AS: PL AS AS2 A PL1 PL: _______ B PL2 O/E: _______ O/E1 O/E2 O/E Decrease in AS: AS2 PL AS PL2 B A PL: _______ PL1 O/E: _______ O/E2 O/E1 O/E DETERMINANTS OF AGGREGATE SUPPLY 1.Resource Prices 2.Productivity 3.Production Technology 4.Government Taxes and Regulations The Four Determinants of AS • Draw the following chart and based on the definition of each determinant figure out what would cause an increase and a decrease in AS for each. • Do this with your partner! Determinants of AS 1. Resource Prices 2.Productivity 3. Production Technology 4. Gov’t taxes and regulations Definition What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) Determinants of AS Definition 1. Resource Prices The price it takes for business to make their goods and/or services 2.Productivity How efficient the labor force is 3. Production Technology The development of new and better technology 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) Determinants of AS Definition What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) 1. Resource Prices The price it takes for business to make their goods and/or services If resource prices goes down, AS shifts to the right. (make more) If resource prices goes up, AS shifts to the left. (make less) 2. Productivity How efficient the labor force is 3. Production Technology The development of new and better technology 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to Determinants of AS 1. Resource Prices 2. Productivity Definition What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? If labor productivity increases, AS shifts to the right. If labor productivity decreases, AS shifts to the left. (MAKE LESS)) The price it takes for business to make their goods and/or services How efficient the labor force is 3. Production Technology The development of new and better technology 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to Determinants of AS Definition 1. Resource Prices The price it takes for business to make their goods and/or services 2. Productivity What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) If you have new or better technology, AS shifts to the right. If you develop no technology, AS shifts to the left. How efficient the labor force is 3. Production Technology The development of new and better technology 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to Determinants of AS Definition 1. Resource Prices The price it takes for business to make their goods and/or services 2. Productivity What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) If less laws and regulations are passed, AS shifts to the right. If more laws and regulations are passed, AS shifts to the left. How efficient the labor force is 3. Production Technology The development of new and better technology 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to Determinants of AS Definition What will cause an Increase in AS? (MAKE MORE) What will cause a Decrease in AS? (MAKE LESS) 1. Resource Prices The price it takes for business to make their goods and/or services If resource prices goes down, AS shifts to the right. (make more) If resource prices goes up, AS shifts to the left. (make less) 2. Productivity How efficient the labor force is If labor productivity increases, AS shifts to the right. If labor productivity decreases, AS shifts to the left. 3. Production Technology The development of new and better technology If you have new or better technology, AS shifts to the right. If you develop no technology, AS shifts to the left. 4. Gov’t taxes and regulations Laws and regulations that the gov’t passes for all businesses to adhere to If less laws and regulations are passed, AS shifts to the right. If more laws and regulations are passed, AS shifts to the left. Complete the following scenarios with your partner by answering the following questions: 1. What happens to AS – does it increase or decrease? 2. Based on which determinant? 3. Which way does the graph shift? 4. What happens to PL? 5. What happens of O/E? 6. Draw the graph. Complete the following scenarios with your partner: 1.The auto industry is experiencing an increase in the price of steel. Using AD/AS analysis, show the effects of aggregate supply, prices and output/employment. Shift the AS curve? 2. Labor productivity in the U.S. is on the rise. Graph the situation and show how aggregate supply, prices and output/employment are affected. Shift the AS curve? 3. Improved technology has been developed in the U.S. computer industry. Graph the situation and show how aggregate supply, prices and output/employment are affected. Shift the AS curve? 4. New government regulations have been passed by Congress to improve the safety of SUVs. Graph the situation and show how aggregate supply, prices and output/employment are affected. Shift the AS curve? 5. Labor productivity in the computer industry has been rising at a faster rate than worker’s wages. Graph the situation and show how aggregate supply, prices and output/employment are affected. Wrap-Up What are the three ranges of AS? In which range is the economy the best? The worst? Explain why. What is aggregate output? What is price level? What are two other ways to say Output/Employment? What are the four determinants of AS? What causes an increase in AS? A decrease?