Aggregate demand. Aggregate Demand and supply. Graphical Derivation of AD. Shifts of AD. Remarks ( )

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1 Aggrgat dmand Aggrgat Dmand and suppl Th ntrscton of th IS- curvs shows th valus of and such that th mon markt clars and actual and plannd xpndturs ar qual for gvn valu of,, G and T. To s how th IS- curvs mpl th xstnc of a downward sloppng rlatonshp btwn and, consdr th ffcts of assumng a hghr valu of. Snc th prc lvl dos not ntr th plannd xpndtur functon (.), th IS curv s unaffctd. Th rs n prc lvl rducs th suppl of ral mon. Thus a hghr ntrst rat s ndd to clar th mon markt for a gvn lvl of ncom, and so th curv shfts up. Graphcal Drvaton of I * * * * Knsan ffct:quvalnc btwn prc changs and montar polc IS Th aggrgat dmand curv tlls how much popl wll dmand at a gvn lvl of prcs. Th hghr th prc lvl, th lss. Th curv s downward slopng. IS : (,, G, T ) : (, ) dffrnc at wth rspct to d p d d Th slop of th Aggrgat Dmand d d ( ) d d d d d d < : d d d flattr flattr flattr + d d ISvrtcal nfntl lastc dmand for mon (lqudt trap) d vrtcal d Rmarks An paramtr confguraton that maks montar polc mor ffctv wll mak th flattr. An paramtr confguraton that maks montar polc lss ffctv wll mak th curv stpr. Shfts of Th curv shfts to th rght(lft) f thr montar and fscal polc s xpansonar(rstrctv). G I

2 Introducton Aggrgat suppl (AS) dscrbs th amount of output that th basc rsourcs of th conom ar capabl of producng. Th mportant dtrmnants of AS ar: Th numbr of popl avalabl for work and thr productvt. Th amount of qupmnt, structurs, land and othr tps of captal. Th tchnolog : tlls us how much output can b producd from th amount of labor and captal usd n producton. Th smpl wa to dscrb th tchnolog n trms of a producton functon: F(K, N) Introducton AS bhavs vr dffrntl n th short run than n th long run. In th long run prcs ar flxbl, and th AS s vrtcal. Hnc shfts n th curv affcts th prc lvl, but th output rmans at ts natural lvl. In th short run, prcs ar stck, and th AS curv s not vrtcal. In ths cas, shfts n aggrgat dmand do caus fluctuatons n output. Thr ar four modls of th short run aggrgat suppl curv.ths modls dffr n two charactrstcs: whthr th assum that markts clar and whthr th k markt mprfcton ls n th goods markt or n th labour markt. Introducton Th four thors of AS: Th stck-wag, workrmsprcpton, mprfct-nformaton, and stck-prc modls, attrbut dvatons of output and mplomnt from th natural rat to varous markt mprfctons. Accordng to all four thors, output rss abov th natural rat whn th prc lvl xcds th xpctd prc lvl, and output falls blow th natural rat whn th prc lvl s lss than th xpctd prc lvl. Although th four modls of AS dffr n thr assumptons and mphass, thr mplcatons for aggrgat output ar smlar. All can b summarzd b th quaton: n +α (- ) Th stck-wag odl Th comptton s mprfct n th labor markt. Stck wags: nomonal wags adjust slowl. Two knds of mprfctl compttv modls of labor markt: odl, basd on th dnamcs of wag sttng undr trad unons, collctv barganng powr. Th ablt of an ndvdual unon to ras wags wll b condtond b th unmplomnt rat. odl, basd on ffcnc wag, mphaszs that ndvdual workrs hav barganng powr. Thr s an asmmtrc nformaton about workr ffort. Emplors hav mprfct nformaton about workr ffort, bcaus montorng and survllanc ar costl, so th us wag as an ncntv dvc. Hnc job loss s costl for a workr, frst whn h s frd, h losss th wag and th probablt to fnd a nw job. A hghr unmplomnt rat ncrass th cost of job loss and prmts mplors to lct workr ffort wth a smallr wag. Concluson: th wag bargan dpnds on th unmplomnt rat. Factors that dtrmn th sz of th wag adjustmnt Th stat of th labor markt: If unmplomnt s hgh thn labor wll b n a rlatvl wak barganng poston. Th thrat of strk s mor crdbl n good tm than n bad. A scond factor nfluncng wag barganng s th wag pad to comparabl workrs n othr ndustrs. Bcaus not all contract ngotatons ar snchronzd, thr ar to componnts of ths comparson wag: th wag sttlmnt of workrs who hav rcntl sgnd contracts, and th xpctd wag sttlmnts of workrs who wll b sgnng thr contracts n th nar futur (backward lookng and forward lookng bhavour) A thrd factor that wll nflunc wag dcsons s th xpctd rat of nflaton.

3 Bargand ral wag curv Assumptons Imprfct comptton n th labor markt. n rflcts th snstvt of wag-sttng to labor markt forcs. abor s th onl varabl nput n producton: f(n) Short run producton functon dsplas constant rturns to labor: N N: numbr of unts of labor or workrs abor forc, s constant. Suppl curv for labour s nlastc(vrtcal) Th lnar vrson of th wag curv s: F F( u), < u n nu u N n o m o Bargand ral wag curv Th unmplomnt rat u: n N [ ] + m ( n ( m + m ) n ) + n ( ) m > Th slop of wag curv s upward hn N u puttng workrs n a strongr barganng poston t hat allows thm to wn hghr wag Barganng ral wag curv /p ag curv. Th prc-dtrmnd ral wag max, ttng () b th nvrs dmand functon, th prc that must b chargd to sll unts of output ax F. O. C ( ) + ' ( ) C ' ( ) Th F.O.C sas that at th proft output ( ) + C ( ) D ( ) ( ) C ( ) margnal d rvnu C ' ( ) must - maxmsng qual margnal choc cost. of ( ) ( ) ( ) d [ + ] C' ( ) Th prc-dtrmnd ral wag [ + ] ε ( ) ε ( ) s th prc lastct of dmand facng th monopolst [ ] ε ( ) whch s ngatv so : wth ε ( )( ) + ( ) ( + ) Frms ar monopols that fac a dmand curv wth a constant lastct. : dpnds onl on that mark-up: ( + ) + Th mark-up s th gap btwn prc and total cost of producton. Th mark-up hpothss sas that th gap s clos to constant. Undr th mark-up hpothss, costs ar th prm dtrmnant of prc and changs n dmand hav lttl ffct on prc. th constant lastct, th ffct of dmand s gnord 3

4 suppos that prcs ar st mmdatl aftr wags hav bn ngotatd. So frms hav bttr nformaton than workrs:frms know thr costs of producton but workrs do not. /, / ag curv /, / / / /(+) / R Gap btwn th ral bargand wag and th ral wag th rcv.bcaus frms dtrmn th prc whch s gratr than th xpctd prc b workrs. / n rc dtrmnng ral wag Th qulbrum s rachd whn, producton s qual to th full mplomnt lvl. n > n, favourabl barganng poston of workrs, th ngotat an ncras n thr pa, frms ncorporat ths cost ncras through to prcs. (lluson) A hgh lvl of output gvs rs to an nflatonar gap btwn th bargand ral wag and th prc dtrmnd ral wag. hn n > (/ ) > (/ ), mplors barganng poston s strong bcaus th unmplomnt rat s hgh. Th wll prss for mon wag rductons and a downward spral of wag and prcs wll nsu. hn n (/ ) (/ ), workrs hav not mscalculatd and th rcv prcsl th ral wag that bfts thr barganng poston. Natural rat of unmplomnt Thr s unmplomnt vn whn th conom s n boom, substantal unmplomnt xsts vn n qulbrum. Th natural rat of unmplomnt Frctonal unmplomnt + structural unmplomnt Thr sn t a on unqu and wll dfnd natural rat of unmplomnt. In fact, for nw classcal and montarst conomst, natural rat of unmplomnt corrsponds to a full mplomnt, so th absnc of nvoluntar unmplomnt. Nw Knsan thor accpts th xstnc of nvoluntar unmplomnt at th natural rat of unmplomnt. In our modl, bcaus labour suppl s nlastc, workrs ar nvoluntar unmplod n qulbrum.emplomnt s dtrmnd b th quantt of labour that frms dmand. rc xpctatons Rcall that prcs ar stck n th sns that th ar not adjustd quckl b frms n rspons to dmand condtons. Adaptatv xpctaton: - Ratonal xpctatons E() suppos adaptatv xpctatons, workrs xpct th prc lvl to rman constant ovr tm. so th wag s: ( m ( m + m ) + m ) ( m + ( + ) m Th AS curv + m ) > ( + )( m + m ) Th AS curv dscrbs th rlatonshp btwn output and prcs at th aggrgat lvl, gvn th xpctd prc lvl. Th slop of th AS curv s postv. 4

5 AS curv Equlbrum AS AS E E: qulbrum n long-run n Equlbrum s stabl: Rmmbr that, whn ral GD s hgh rlatv to potntal(), unmplomnt s low and mplomnt s hgh. Ths ar condtons to lad to rsng wags and prcs. If dmand has bn strong and frms ar producng mor than th thnk s approprat gvn thr currnt prcs, frm wll ras thr prcs. Ths two ffct caus prcs to ras, th aggrgat dmand dcrass (Kns ffct) A B n D Fscal polc AS AS A: qulbrum n th long-run B:qulbrum n th short-run G and < AS n D: nw long-run qulbrum ong-run: I C+ I + G Fscal polc s an ffctv nstrumnt for controllng th lvl of dmand n th short-run and could b usd for stablzaton purposs. In th long-run, fscal dos not chang th lvl of output but t changs t Composton.Complt crowdng out prvals n th long-run. ontar polc D B A n AS AS B:short-run qulbrum > AS and n and ontar polc s a valuabl nstrumnt for macroconomc stablsaton n th short run. In th long-run, th prc lvl has rsn b th sam proporton as th nomnal mon supplnutralt of mon n th long run Th quaton of xchang V Th trm of vloct s mant to conv th spd at whch th mon stock s turnd ovr from on ndvdual to anothr durng a prod of tm such as a ar. In practc vloct s usuall calculatd b dvdng th mon stock nto nomnal GD. Th quantt thor of mon mphasz that xcssv mon craton b cntral bank s th caus of nflaton n th long run Undr prfct forsght, an antcpatd montar polc wll hav no ral ffcts n th short-run (th conom movs from A to D). Th onl wa to scap ths outcom would b to surprs workrs wth an unantcpatd montar polc. 5