Lecture on Microeconomic Aggregation and Aggregate Demand
Key Concepts
- Microeconomic Model: Represents the quantity output of an entire economy, not just a single industry.
- Aggregate Demand: Total expenditure by different sectors in the economy, including households, businesses, and government.
Components of Aggregate Demand
- Household Consumption
- Determined by disposable income (personal income minus taxes).
- Influenced by long-term income trends and aggregate prices.
- Private Investment
- Includes purchasing structures, equipment.
- Determined by cost of capital, expectations about the future.
- Government Expenditure
- Directly determined by government spending decisions.
- Net Exports
- Value of exports minus imports, influenced by relative prices and exchange rates.
Aggregate Demand Curve
- Shows the Relationship: Between the price level and the quantity of output demanded.
- Inverse Relationship: As general price level falls, quantity demanded increases.
Factors Influencing Aggregate Demand
- Price Level Changes
- Balance Effect: Change in purchasing power due to changes in price level.
- Interest Rate Effect: Higher prices reduce the amount of output demanded as it affects investment and consumption.
- International Trade Effect: Higher domestic prices make foreign goods cheaper, reducing demand for domestic goods.
- Shifts in Aggregate Demand Curve
- Rightward Shift: Indicates an increase in demand, possible through increased consumption, investment, government spending, or exports.
- Leftward Shift: Indicates a decrease in demand.
Determinants of Shifts in Aggregate Demand
- Exogenous Variables: Factors outside the demand and supply framework, such as government policies.
- Policy Variables: Under government control that can influence aggregate demand.
- Factors Leading to Change:
- Changes in consumption, investment, government spending, or net exports can lead to shifts in aggregate demand.
Summary of Effects
- Increased Demand: More spending despite constant prices leads to increased demand.
- Economic Activity: Level of economic activity in other countries can influence domestic aggregate demand.
These notes summarize the key points discussed in the lecture about the aggregation of microeconomic models and the factors influencing aggregate demand in an economy.