Micro and Macro- the difference? Compared to microeconomics which examines the level of economic activity in individual markets for particular goods and services Macroeconomics examines the general factors affecting the overall level of economic activity that results from the collective outcome of production decisions. If we revisit the supply and demand graph, we change from looking at individual markets to the overall market. We now call the demand curve the aggregate demand curve (AD).

Aggregate Demand The word “aggregate” simply means “total”. When we are looking at “Aggregate Demand” we are looking at the total demand for the entire Australian economy. As such we can no longer talk about bread, water tanks or burgers; aggregate demand includes EVERYTHING that we buy in this country. Economists calculate aggregate demand by using the following formula, (need to know this): Aggregate Demand = C + I + G1 + G2 + (X – M)

These components can be broken down into:

Factors Affecting AD The AD curve can shift based on prevailing conditions in the economy. Factors which can influence AD include: The level of income The ability to borrow (interest rates) Business and Consumer Confidence Government policies Conditions overseas

Factors Affecting AD (1) An increase in the level of disposable income will cause more to be demanded at any given price. Example: This could occur because of income tax cuts, increases in the minimum wage or increasing in government transfer payments. AD curve would shift to the ___________

Factors Affecting AD (2) The ability to borrow is affected both by the cost of borrowing (interest rates) and the willingness of financial institutions to release funds. Example: Low interest rates in recent years have increased the demand for borrowed funds. AD curve shift to the ________

Factors Affecting AD (3) When confidence is high, consumers will spend and businesses will invest. Example: In times of uncertainty confidence tends to drop (eg current times of recession OR the period prior to the introduction of the GST in 1999/2000). AD curve shift to the ________

Factors Affecting AD (4) The government intervenes in the Australian economy to influence the level of AD in the pursuit of other goals. Example: The government may use expansionary policies such as a budget deficit to generate economic activity. AD curve shift _______ OR tighter monetary policy to lower inflation (general rise in price). AD curve shifts ________

Factors Affecting AD (5) External conditions can also affect AD in Australia, as around 11% of all Australian production is sold overseas. Example: include the global economic crisis (simultaneous recessions in a number of trading partners). Major trading partners such as China and the US show economic growth slowing. AD curve shifts __________

Class Exercise- AD Curve For these examples, state which component is affected and draw the AD curve and its respective shift and give reasons why : Governments impose a higher income tax Investment in businesses decrease Interests rates increases Government injects funds into the education system A drop in confidence in the sharemarket

Aggregate Supply Aggregate Supply Costs of production refers to the total amount produced in an economy in a given period of time. Unlike aggregate demand, aggregate supply does not have a convenient formula to help establish which factors will affect it. There are a few simple rules which we can use to help us establish which factors will affect aggregate supply: Costs of production Availability of resources Efficiency

1. Cost of production Any change to a cost of production will affect the willingness of suppliers to produce output. For example, a change in i______ rates, wages, t__ rates or the c___ of raw materials can all change the margin available to producers, and as a result will affect the production levels.

2. Availability of resources The way in which resources are allocated refers to both how many resources we have and how we use them. The available resources include land, labour, capital and enterprise. Example: if the participation rate increases and the labour resource becomes more available, suppliers may use the opportunity to increase their levels of production.

3. Efficiency When productivity rates increase, the real cost per item being produced will fall. As a result, suppliers are once again able to make a higher margin on each item that they sell, and so they may be willing to allocate more of their resources to the production of these items. Example: Certain changes such as the introduction of technology or increased levels of training will make the cost per item fall. AS curve shifts ______________

Example…. By using these rules as a guide, we can assess how any factor will affect aggregate supply. Sample questions Productivity rates in Australia have increased  that will lead to a higher level of efficiency in the Australian economy. As a result, the real cost per item has fallen, and the profit margin available to producers has increased. This means aggregate supply will probably ___?____, which is represented by shifting the curve to the __?__.

Factors Affecting AS In very general terms, AS is affected by the profitability of production, the cost of production and the way in which productive resources are allocated. It is important that you understand what each of these things means, and be able to provide some specific examples.

Class exercise- AS curve For these examples, state which component is affected and draw the AS curve and its respective shift and give reasons why : Interest rates (kept low recently) Trade unions have secured wages increases for all workers in the public sector Government has invested in implementing a literary and numeracy program that all secondary students must undertake Internet capabilities have made communication and operation processes more efficient Many local manufacturing companies are outsourcing their labour to other countries

Linking everything together… The level of economic activity is a vital concept, as it represents the combined levels of production, employment, expenditure and income and fluctuations that affect the state of the economy. For eg. A fall in the level of economic activity leads to  levels of production and employment which leads to,  levels of income and expenditure (consumption & investment) If a fall in economic activity is severe enough, problems such as unemployment, low levels of growth and a state of economic recession can develop. These are issues you will need to be able to link together in order to gain full marks in extended response questions. You WILL need to know what SUPPLY SIDE POLICIES, governments use to affect economic growth