Lecture Notes on Microeconomics and Aggregate Demand
Introduction
- The lecture discusses the microeconomic model focusing on the aggregation of microeconomic models to explain national economic activity.
- Key focus is on aggregate demand and its components in the economy.
Aggregate Demand
- Definition: Refers to the total spending by different sectors in the economy, such as consumers, businesses, and government.
- Components:
- Household consumption
- Private investment
- Government expenditure
- Net exports (exports minus imports)
Factors Influencing Aggregate Demand
- Price Levels: Affects purchasing power and demand.
- Monetary Policy: Interest rates influence spending and investment.
- Fiscal Policy: Government spending and taxation decisions.
- Expectations: Future expectations of consumers and businesses can drive spending.
Aggregate Demand Curve
- Shows the relationship between price level and the quantity of real GDP demanded.
- Inverse Relationship: As price levels decrease, demand for output increases.
Components of Aggregate Demand
- Consumption:
- Influenced by disposable income (personal income minus taxes) and wealth.
- Investment:
- Affected by cost of capital and expectations about future economic conditions.
- Government Spending:
- Directly determined by government decisions and policies.
- Net Exports:
- Influenced by relative prices and exchange rates.
Effects Explaining Aggregate Demand
- Balance Effect: Changes in price levels affect the purchasing power.
- Interest Rate Effect: Higher prices increase interest rates, affecting investment and consumption.
- International Trade Effect: Price level changes affect the relative competitiveness of domestic goods.
Shifts in Aggregate Demand
- Rightward Shift: Indicates increased demand at the same price level due to increased consumption, investment, government spending, or net exports.
- Leftward Shift: Indicates decreased demand due to opposite factors.
Factors Causing Shifts in Aggregate Demand
- Exogenous Variables: Factors outside the aggregate demand model, including:
- Economic activity in other countries
- Changes in policy variables
- Technological advancements
Summary
- Understanding aggregate demand is crucial for analyzing overall economic activity.
- It involves examining various components and external factors that contribute to changes in demand.
The lecture emphasizes the importance of aggregate demand in determining economic performance and policy implications.