Economics - Chapter 13 (Aggregate demand)

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  • Created by: sammilaw
  • Created on: 30-12-14 13:57
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  • Chapter 13: Aggregate demand
    • AD curve slopes down (left to right):
      • When prices fall, consumers experience a wealth effect which will increase consumption so more will be purchased at lower prices
      • A fall in the price of UK goods lowers the price of exports so more will sell abroad
        • Also, imports would become more expensive so the demand for domestically produced goods increases
      • Expectations i.e. if consumers expect prices to rise in the future they will buy more now and vice versa
    • Shifts of the AD curve:
      • C + I + G + (X-M)
      • Investment
        • The Rate of Interest
          • A fall in interest rates will shift the AD curve to the right
            • As borrowing will be cheaper so firms will want to invest in new equipment to improve productivity etc.
        • Business Expectations
          • Positive expectations = increased investment = shift right
          • Negative expectations = decrease in investment = shift left
        • The Rate of Technical Progress
          • New equipment/developments = increased investment = shift right
            • As firms without the new technologies will lose sales to those that have it i.e. lower productivity
        • The Rate of Change of Income
          • Will affect firms' demand
            • If there is an increase in demand and the firm is already working at full capacity, it will lead to an increase in investment expenditure as firms will want to be able to cater for increased consumption
          • As investment is > individual goods that are produced = large injection into circular flow = shift right
      • Government Expenditure
      • Net exports
        • If European economies are growing, demands for exports should increase = shift right
        • If sterling has fallen in value against the euro, UK exports will be cheaper in Europe = shift right
        • If incomes are rising, consumers are likely to spend more on imports = shift left
        • If the value of sterling rises, imports will seem cheaper in the UK and consumers will spend more on these cheap imports = shift left


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