EC140 Lecture Notes - Lecture 8: Diminishing Returns, Aggregate Demand
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EC140 Full Course Notes
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Ec 140- lecture 8: chapter 23; output and prices in the short run. Quantity demanded falls: macroeconomics- what is the effect, the money that people hold can buy fewer goods, people are effectively poorer- consumption falls. Similarly: a fall in prices: value of money held goes up, consumption therefore rises. Ad curve shows level of real gdp for each price level where desired aggregate expenditure equals actual gdp: equilibrium output form the simple macro model for each price level. Changes in the price level cause: shifts of the ae curve, movements along the ad curve. As price rises: people are poorer, consumption falls, foreign goods are relatively cheaper, imports rise, exports fall. All three changes mean that as prices rise, real gdp falls: move up and left along the ad curve. As curve shows for each price level the amount of output firms would like to produce and sell. Assumptions: constant technology, constant input prices.
