Economics AQA Unit 2 - Revision Notes

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  • Created on: 22-01-13 19:14
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Economics Unit 2 ­ Notes
Aggregate Demand:
Definition = Total expenditure in an economy (consumers, businesses,
government, firms overseas)
Why the curve slopes from left to right:
When prices fall consumers experience the wealth effect ­ they feel better off and
so buy more goods and services ­ the wealth affect will increase consumption so
more is purchased at lower prices
A fall in the price of UK goods lowers the price of UK exports = more will sell abroad
& less imported so demand for UK goods increases and so does output
Expectations ­ If prices are expected to rise in future = consumption increased
now/If prices are expected to fall = buy later
Shifts of AD Curve
Caused by any factor that affects AD:
Government Spending
Exports ­ Imports
Explanation of factors affecting AD:
Increased Investment = Increased AD
Rate of Interest ­ Fall in rate = increased AD (borrowing is cheaper = firms invest more in
equipment to maintain or improve their competitive position) Increase in rate = reduced AD (Deter
Business Expectations ­ Interest rate falling = business expect more sales in future = positive
expectations = increase in investment = increased AD (People & Firms will save more and postpone
Rate of Technical Progress = New equipment & technology = Increased investment = Increased AD
Rate of Change of Income

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Government Spending
Increased spending into areas like schools & hospital = Increased AD
Reduced Spending = Reduced AD
Changes in Monetary Policy ­Interest rates fall = lowers cost of borrowing & reduces
incentive to save = Increased AD
Changes in Fiscal Policy ­ Government increase spending = Increased AD, Lower
rates of income tax = Increased AD, Increase in welfare payments = Increased AD
Net Exports (X-M)
Dependant on AD in major trading partners ­ European economies are growing =
Demand for UK exports increase…read more

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Shift in SRAS
Cause: Any factor that changes firms costs
Increase in costs = Decrease in SRAS
Decrease in Costs = Increase in SRAS
Factors Affecting SRAS:
Wage Rate ­ Increase in wage rate = increase firms costs = Decreased SRAS
Interest Rates ­ Increase in rate of interest = More expensive for firms to borrow =
Reduce SRAS
Raw Material Prices ­ Increase in price of raw materials = Increase costs = Reduce
Taxations & Subsidies ­ Increase in tax = increase costs…read more

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Full Employment:
Unemployment = Waste of a scarce factor of production
Governments want to promote full employment:
Increases standard of living
Reduces human misery (economic, social and health problems in the unemployed)
More income for Governments (tax payments)
Reducing expenditure on benefits
Scenario (Policy Conflict):
Can be achieved by increasing AD
Increasing AD = Inflation/Higher Prices
Higher prices = Less competitive exports (reduced)/ Cheaper Imports increased
Increase LRAS ­ Use supply side policies (Make labour more employable and flexible) ­ will also mean that…read more



really good notes :D

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