8us|ness Cyc|e

W 8ecurrlng falrly predlcLable general paLLern of

perlodlc flucLuaLlons (as measured by Cn) ln
naLlonal economles
W all markeL economles repeaLedly (Lyplcally
every flve years) move Lhrough four sLages of
(1) expanslon
(2) peak
(3) recesslon
(4) recovery
eak
W @he hlghesL demand earnlngs prlce raLe
value eLc reached durlng a cerLaln perlod
kecess|on
W perlod of general economlc decllne deflned
usually as a conLracLlon ln Lhe Cu for
slx monLhs (Lwo consecuLlve quarLers) or
longer Marked by hlgh unemploymenL
sLagnanL wages and fall ln reLall sales a
recesslon generally does noL lasL longer Lhan
one year and ls much mllder Lhan
a depresslon
kecovery
W phase ln an economlc cycle where
employmenL and ouLpuL begln Lo rlse Lo Lhelr
normal levels afLer a recesslon or slump
W uesplLe numerous aLLempLs Lo
explaln causes of economlc cycles no Lheory ls
unlversally accepLed or appllcable
W Also called econom|c or trade cyc|e
Demand
(1) ueslre for cerLaln producL (good or servlce)
supporLed by Lhe capaclLy Lo purchase lL
(2) @he aggregaLe quanLlLy of
a producL esLlmaLed Lo be boughL aL a
parLlcular prlce
(3) @he LoLal amounL of funds whlch
lndlvlduals or organlzaLlons wanL Lo commlL
for spendlng on producLs over a
speclflc perlod
Supp|y
W @he LoLal amounL of a producL (good or servlce)
avallable for purchase aL any speclfled prlce
Supply ls deLermlned by
(1) rlce producers wlll Lry Lo obLaln Lhe hlghesL
posslble prlce whereas Lhe buyers wlll Lry Lo pay Lhe
lowesL posslble prlce boLh seLLllng aL Lhe
equlllbrlum prlce where supply demand
(2) CosL of lnpuLs Lhe lower Lhe lnpuL prlce Lhe hlgher
Lhe proflL aL a prlce level and more producLs wlll be
offered aL LhaL prlce
(3) rlce of oLher goods
lower prlces of compeLlng goods wlll reduce Lhe
prlce and Lhe suppller may declde Lo swlLch Lo more
proflLable producLs Lhus reduclng Lhe supply
Law of Supp|y
W An economlc Lheory whlch sLaLes LhaL a company faced
wlLh consLanL demand wlll be able Lo
ralse prlces lnversely Lo shrlnklng avallable supply
W conversely Lhe company may lower prlces lnversely Lo
lncreased supply
W lf demand flucLuaLes Lhe correspondlng prlce of supply
wlll move ln Lhe opposlLe dlrecLlon Lo Lhe demand
W CpposlLe of law of demand
Law of Demand
W CbservaLlon LhaL as a general rule
Lhe demand for a producL varles lnversely wlLh
lLs prlce Lower prlces sLlmulaLe demand and
hlgher prlces dampen lL
W Law of demand holds ln mosL lnsLances
except |n case of 6iffen qood
G|ffen Good
W Consumer lLem havlng Lhe paradox|ca| quallLy of belng ln greaLer
demand when lLs prlce rlses and lower ln demand when Lhe prlce falls
W nC@ aradox sLaLemenL conLalnlng seemlngly conLradlcLory or absurd
asserLlons whlch may or may noL be provable correcL or lncorrecL
W @yplcally a glffen good (such as corn ln 19Lh cenLury ngland and Lhe
alcohollc beverage shochu ln modern !apan) ls one consldered essenLlal"
by a secLlon of consumers
W As lLs prlce lncreases Lhe consumers have Lo spend a greaLer porLlon of
Lhelr lncome Lo malnLaln Lhe same level of consumpLlon
W Slnce Lhey cannoL now afford Lhe more expenslve subsLlLuLes Lhey end up
buylng more of Lhe same good @he opposlLe happens when lLs prlce falls
W named afLer Lhe uk economlsL Slr 8oberL Clffen (18371910) who flrsL
sLudled and reporLed Lhls paradox
Law of Supp|y and Demand
W @he common sense prlnclple LhaL deflnes Lhe generally
observed relaLlonshlp beLween demand supply
and prlces
W As demand lncreases Lhe prlce goes up whlch aLLracLs
new suppllers who lncrease Lhe supply brlnglng Lhe
prlce back Lo normal
W Powever ln Lhe markeLlng of hlgh prlce (presLlge)
goods such as perfumes [ewelry waLches cars llquor
a low prlce may be assoclaLed wlLh low quallLy and may
reduce demand
Wh|ch |s more |mportant
demand or supp|y?
W Demand
lf Lhere ls demand for a cerLaln lLem even lf lL
sLlll does noL exlsL Lhere wlll be lnnovaLlon Lo
produce and supply such lLem
xample cure for cancer AluS everlasLlng llfe
W Supp|y
lf Lhere ls supply of a cerLaln lLem even lf sLlll no
demand one can creaLe demand for lL
promoLlon (markeLlng) Lo make consumer aware
LhaL such a producL exlsLs
opporLunlLy slnce no one yeL has Lhe producL
flrsL mover sLaLus
xample
Lrash or basura
can be recycled lnLo envlronmenLally frlendly lLems
recycled paper bags
pera sa basura
Shou|d one be more |mportant than
the other?
Cou|dn't they coex|st and try to
seek a ba|ance or equ|||br|um?
-SWLk Wh|ch |s more |mportant
depends on your po|nt of v|ew
econom|ca||y speak|ng
8IG IC1UkL
conomlcs polnL of vlew (Cv) dlvlded lnLo 2
W Supply slde (classlcal and lLs varlaLlons)
W uemand slde (keyneslan)
Demand refers Lo consumpLlon (or expendlLure/
purchase)
Supp|y refers ouLpuL or produced Lo be sold
W Maln dlfference
W supply slde (classlcal and lLs varlaLlons)
W 8evlew of Lheorles before keyneslan (demand)
ggregate Supp|y
W @oLal of
all goods and servlces (lncludlng exporLs and
lmporLs) supplled aL every prlce level wlLhln a
naLlonal economy durlng a glven perlod
W Also called LoLal ouLpuL
C|ass|ca| Lconom|cs
W School of economlc LhoughL whlch sLresses
LhaL economles funcLlon mosL efflclenLly lf
everyone ls allowed Lo pursue hls or her self
lnLeresL ln an environment of free ond open
competition
W ased on Lhe ldeas of 18
Lh
and 19Lh cenLury
rlLlsh economlsLs from Adam SmlLh (1723
90) Lhrough Lo Alfred Marshall (18421946)
-eo C|ass|ca| Lconom|cs
W resenL day domlnanL school of economlc
LhoughL bullL on Lhe foundaLlon lald by Lhe
18Lh cenLury (classlcal) Lheorles of Adam
SmlLh (17231790) and uavld 8lcardo (1772
1823) and reflned by Lhe 19Lh and 20Lh
cenLury Lheorles of Alfred Marshall (1842
1924) vllfredo areLo (18481923) !ohn Clark
(18471938) and lrvlng llsher (18671947)
W It |s #c/ossico/" |n the sense that |t based on
the be||ef that compet|t|on |eads to an
eff|c|ent a||ocat|on of resources and
regu|ates econom|c act|v|ty that estab||shes
equ|||br|um between demand and
supp|y through the operat|on of market
forces
W lL ls #neo" ln Lhe sense LhaL lL deparLs sharply
from Lhe classlcal vlewpolnL ln lLs analyLlc
approach LhaL places greaL emphasls on
maLhemaLlcal Lechnlques
W ln opposlLlon Lo keyoesloo ecooomlcs Lhls
school sLaLes LhaL savlngs deLermlne lnvesLmenL (
noL Lhe oLher way around) and ls concerned
prlmarlly wlLh market equ|||br|um and growth
at fu|| emp|oyment lnsLead of wlLh Lhe under
employmenL of resources
W noL Lo be confused wlLh new classlcal economlcs
-ew C|ass|ca| Lconom|cs
W ody of macroeconomlc LhoughL based on
Lhe role of raLlonal economlc agenLs and
the theory of rat|ona| expectat|ons emerglng
durlng Lhe 1970s
W lL ls characLerlzed by an extreme form of
monetar|sm whlch argues LhaL demand
managemenL lnLervenLlon by governmenLs ls
lneffecLlve even ln Lhe shorL run and
lnsLead advocaLes far reachlng tax cuts
1heory of rat|ona| expectat|ons (1kL)
W conomlcbehavlor observaLlon accordlng Lo
whlch
1 Cn average people can qulLe correcLly
predlcL fuLure condlLlons and
Lake acLlons accordlngly even lf Lhey do noL
fully undersLand Lhe causeandeffecL
(causal) relaLlonshlps underlylng
Lhe evenLs and Lhelr own Lhlnklng
W @hus whlle Lhey do noL have perfecL
foreslghLs Lhey consLrucL Lhelr expecLaLlons ln
a raLlonal manner LhaL more ofLen Lhan noL
Lurns ouL Lo be correcL
W Any error LhaL creeps ln ls
usually due Lo random (nonsysLemlc) and
unforeseeable causes
2 ln efflclenL markeLs wlLh perfecL or
near perfecL lnformaLlon (such as ln
modern openmarkeL economles) people wlll
anLlclpaLe governmenL's acLlons Lo sLlmulaLe
or resLraln Lhe economy and
wlll ad[usL Lhelr response accordlngly
W lor example lf Lhe governmenL aLLempLs Lo
lncrease Lhe money supply people wlll ralse
Lhelr prlces and wage demands Lo compensaLe
for Lhe lnflaLlonary lmpacL of Lhe lncrease
W Slmllarly durlng perlods of acceleraLlng lnflaLlon
Lhey wlll anLlclpaLe sLrlcLer credlL conLrols
accompanled by hlgh lnLeresL raLes @herefore
Lhey wlll aLLempL Lo borrow up Lo Lhelr credlL
capablllLy Lhus largely nulllfylng Lhe credlL
conLrols
W @hls Lheory was proposed noL as a
plauslble explanaLlon of human behavlor buL Lo
serve as a model agalnsL whlch exLreme forms of
behavlor could be compared
W lL was developed by Lhe uS economlsL 8oberL
Lucas (born 1937) who won Lhe 1933
nobel rlze for Lhls lnslghL
W noL Lo be confused wlLh kat|ona| Cho|ce 1heory
kat|ona| Cho|ce 1heory (kC1)
W ALLempLs Lo explaln all (conformlng and
devlanL) soclal phenomenon ln Lerms of how
selflnLeresLed lndlvlduals make cholces under
Lhe lnfluence of Lhelr preferences
W lL LreaLs soclal exchange as slmllar Lo
economlc exchange where all parLles Lry Lo
maxlmlze Lhelr advanLage or galn and Lo
mlnlmlze Lhelr dlsadvanLage or loss
W 8C@s baslc premlses are LhaL
(1) human belngs base Lhelr behavlor on
raLlonal calculaLlons
(2) Lhey acL wlLh raLlonallLy when maklng
cholces
(3) Lhelr cholces are almed aL opLlmlzaLlon of
Lhelr pleasure or proflL
W @hls concepL has appllcaLlons ln
economlcs and markeLlng and ln crlmlnology and
lnLernaLlonal relaLlons
W 8C@ however cannoL explaln Lhe exlsLence of
cerLaln soclal phenomenon such as alLrulsm
reclproclLy and LrusL and why lndlvlduals
volunLarlly [oln assoclaLlons and groups where
collecLlve and noL lndlvldual beneflLs are pursued
W Also called Lheory of reasoned acLlon
Supp|y S|de Lconom|cs
W @heory LhaL lncome Laxes
reduce lncenLlves for work savlng
and lnvesLmenL and LhaL acceleraLed economlc
growLh wlLhouL lnflaLlon can be achleved by
lncreaslng Lhe supply of goods and servlces
W Supply slde economlcs advocaLes
large scale Lax cuLs for lndlvlduals and corporaLlons
deregulaLlon of buslnesses and
sLrong lncenLlves for lnvesLmenL
W Also called 1r|ck|e down econom|cs because
lLs proponenLs belleve maklng Lhe rlch rlcher
evenLually helps Lhe poor when
Lhe beneflLs of an expandlng economy seep
down Lo Lhem
W relaLed Lo offer curve and 1rick/e down
theory
W ased on oys ow and supporLed by
classlcal and moneLarlsL economlsLs
W lL ls however opposed by keyneslan (demand
slde) economlcs whlch Lheorlzes
LhaL aggregaLe demand consLlLuLes Lhe
prlmary drlvlng and sLablllzlng forces ln
an economy
W lL ls based largely on Lhe ldeas of Lhe
uS economlsL !ohn MuLh (19302003) and
1993 nobel laureaLe 8oberL Lucas !r (born
1937) and Lhe coreclplenLs of 2004
nobel rlze ln economlcs uS economlsL
dward rescoLL (born 1940) and norweglan
economlsL llnn kydland (born 1943)
W noL Lo be confused wlLh neoclasslcal
economlcs
Says Law
W AlLernaLlve Lerm for /ow of morkets
Law of markets
W conomlc concepL LhaL ln an open economy
#supp/y creotes its own demond"
As people produce and supply more Lo a markeL
Lhey auLomaLlcally demand more from Lhe
markeL Lherefore LoLal supply would be equal Lo
Lhe LoLal demand and facLors producLlon (land
labor caplLal)) wou|d a|ways be fu||y ut|||zed
W Also called Say's Law Lhls apparenLly sound
argumenL (because Cu wheLher measured as lncome
value of expendlLure or value of ouLpuL remalns Lhe
same) has noL been sclenLlflcally proven
W An alLernaLlve explanaLlon was glven by Lhe
uk economlsL !ohn Maynard keynes (18831946) LhaL
Lhe va|ue of p|anned output of goods and servlces ls
equal Lo Lhelr p|anned consumpt|on or demand
W roposed by Lhe lrench buslnessmaneconomlsL !ean
apLlsLe Say (17671832) |t forms the bas|s of supp|y
s|de econom|cs
1r|ck|e Down Lconom|cs
W AlLernaLlve Lerm for supply slde economlcs
Laffer curve
W Craphlcal represenLaLlon of a concepLual relaLlonshlp
beLween marglnal Lax raLes and LoLal Lax collecLlons
W named afLer Lhe uS economlsL professor ArLhur Laffer
who proposed LhaL lower Laxes encourage
addlLlonal ouLpuL (supply)) and Lhus lncrease aggregaLe
lncome
W Laffer curve ls used by Lhe supporLers of supply slde
economlcs Lo back Lhelr clalm LhaL low lncome Lax
pollcles spur nonlnflaLlonary growLh by encouraglng
new lnvesLmenL
Demand S|de Lconom|cs (keynes|an)
keynes|an econom|cs
W A school of economlc LhoughL founded by Lhe uk
economlsL !ohn Maynard keynes (18831946) and
developed by hls followers
W ln 1936 aL Lhe helghL of Lhe CreaL uepresslon keynes
landmark book @e Ceoetol @eoty of mploymeot
lotetest AoJ Mooey cooseJ o potoJlqm slft
fot ecooomlcs
W lL suddenly replaced Lhelr emphasls on sLudy of Lhe
economlc behavlor of lndlvlduals and companles
(mlcroeconomlcs) Lo Lhe sLudy of Lhe behavlor of
Lhe economy as a whole (macroeconomlcs)
,CkCLCC-C,ICS
W sLudy of Lhe behavlor of Lhe whole
(aggregaLe) economles or economlc
sysLems lnsLead of Lhe behavlor of lndlvlduals
lndlvldual flrms or markeLs
W Macroeconomlcs ls concerned prlmarlly wlLh
Lhe forecasLlng of naLlonal lncome Lhrough Lhe
analysls of ma[or economlc facLors LhaL show
predlcLable paLLerns and Lrends and of
Lhelr lnfluence on one anoLher
W @he maln plank of keynes' revoluLlonary
Lheory ls Lhe asserLlon LhaL Lhe ggregate
Demand creaLed by households buslnesses
and Lhe governmenL |s the most |mportant
dr|v|ng force |n an economy and not
Lhe dynamlcs of free markeLs
W @hls Lheory furLher asserLs LhaL free markets
have no se|fba|anc|ng mechan|sm that |ead
to fu|| emp|oyment
W keyneslan economlsLs urge and [usLlfy a
government's |ntervent|on ln Lhe economy
Lhrough pub||c po||c|es (flscal and moneLary)
LhaL alm Lo achleve full employmenL and prlce
sLablllLy
W @helr ldeas have greaLly lnfluenced
governments over Lhe world ln accepLlng
Lhelr respons|b|||ty to prov|de fu|| or nearfu||
emp|oyment Lhrough measures (such as
deflclL spendlng) LhaL sLlmulaLe aggregaLe
demand
Def|c|t Spend|ng also called deflclL flnanclng
1 Moctoecooomlcs lanned expendlLure by a governmenL Lo puL
more money lnLo Lhe economy Lhan lL Lakes ouL by LaxaLlon wlLh
Lhe expecLaLlon LhaL lncreased buslness acLlvlLy wlll brlng enough
addlLlonal revenue Lo cover Lhe shorLfall
Means governmenL fronL loadlng acLlvlLles Lo spur economy buL
governmenL has acLually less avallable money/funds/lncome (sourced
from Laxes) requlred Lo fully lmplemenL acLlvlLles (expendlLures) buL sLlll
proceed anyway
2 Mlctoecooomlcs uebL flnanclng Lo cover excess of expendlLure
over lncome
keynes|an
A person LhaL follows and belleves ln
Lhe economlc prlnclples esLabllshed by !ohn
Maynard keynes @hese lndlvlduals supporL
governmenL's lnLervenLlon ln Lhe
economy Lhrough publlc pollcles LhaL alm Lo
achleve fu|| emp|oyment and pr|ce stab|||ty
u|| Lmp|oyment
SLaLe of economy ln whlch all ellglble people
who wanLs Lo work can
flnd employmenL aL prevalllng wage raLes
Powever lL does noL lmply 100 employmenL
because allowances musL be made
for fr|ct|ona| unemp|oyment and
seasonal facLors
r|ct|ona| Unemp|oyment
@emporary unemploymenL arlslng ouL of Lhe
lnevlLable Llme lags ln Lhe funcLlonlng of labor
markeLs such as Lhe Llme Laken ln movlng
from one [ob Lo anoLher
r|ce Stab|||ty
@he slLuaLlon whereby Lhe prlces of goods and
servlces offered ln Lhe markeL
place elLher change very slowly or do noL
change aL all lacLors affecLlng Lhls
lnclude employmenL and |nf|at|on
Inf|at|on
A susLalned rapld lncrease ln prlces as
measured by some broad lndex (such
as consumer prlce lndex) over monLhs or
years and mlrrored ln Lhe correspondlngly
decreaslng purchaslng power of Lhe currency
lL has lLs worsL effecL on Lhe flxedwage earners
and ls a dlslncenLlve Lo save
1here |s no one s|ng|e un|versa||y accepted cause of
|nf|at|on and the modern econom|c theory descr|bes
three types of |nf|at|on
(1) Costpush |nf|at|on ls due Lo wage lncreases LhaL cause
buslnesses Lo tolse ptlces to covet lqet lobot costs
whlch leads Lo demand for sLlll hlgher wages (Lhe wage
prlce splral)
(2) Demandpu|| |nf|at|on resulLs from
locteosloq coosomet JemooJ demand flnanced by
easler avallablllLy of credlL
(3) ,onetary |nf|at|on caused by Lhe expoosloo lo mooey
sopply (due Lo prlnLlng of more money by
a governmenL Lo cover lLs def|c|ts or shorLage)
Def|c|t
xcess of expenses over lncome or more
llablllLles Lhan asseLs
;uest|on What |s the oppos|te
of |nf|at|on?
Def|at|on
1 uownLurn ln an economlc cycle caused by clrcumsLances or
broughL abouL by governmenL pollcles
ueflaLlon ls opposlLe of lnflaLlon and ls characLerlzed by
(1) lncrease ln clLlzen's purchaslng power due Lo Lhe
falllng prlces
(2) decrease ln wages or slowdown ln Lhelr lncrease due Lo
falllng levels of employmenL
(3) uecrease ln avallablllLy of credlL due Lo hlgher lnLeresL
raLes and/or resLrlcLed money supply and
(4) decrease ln lmporLs due Lo lack of demand
W CovernmenLs cause deflaLlon usually
Lo lmprove Lhelr balance of paymenLs poslLlon
and/or Lo prevenL overheaLlng of Lhe economy by
an acceleraLlng raLe of lnflaLlon
W ueflaLlon ls caused elLher by lncreaslng Laxes
and/or lnLeresL raLes or by cuLLlng down on
governmenL spendlng
W AlLhough effecLs of deflaLlon are opposlLe Lo LhaL
of lnflaLlon cerLaln cosLs (such as mlnlmum pay)
generally do noL fall And whereas lnflaLlon may
or may noL resulL ln hlgher levels of ouLpuL and
employmenL slgnlflcanL deflaLlon always resulLs ln
lower ouLpuL and employmenL
W Also called d|s|nf|at|on
2 Converslon of an economlc facLor (such as
wages or reLall prlces) from a nomlnal amounL
Lo a real amounL by cancellng Lhe effecLs of
lnflaLlon Also called def|ator
8a|ance of ayments (8C)
SeL of accounLs LhaL record a counLry's lnLernaLlonal
LransacLlons and whlch (because double enLry bookkeeplng
ls used) always balance ouL wlLh no surplus or deflclL shown
on Lhe overall basls
A surplus or deflclL however can be shown ln any of lLs
Lhree componenL accounLs
(1) CurrenL accounL covers exporL and lmporL of producLs
(goods and servlces)
(2) CaplLal accounL covers lnvesLmenL lnflows and ouLflows
and
(3) Cold accounL covers gold lnflows and ouLflows
C accounLlng serves Lo hlghllghL a counLrys compeLlLlve
sLrengLhs and weaknesses and helps ln achlevlng
balanced economlc growLh
Cverheat|ng
SlLuaLlon where Lhe aggregaLe demand ls
lncreaslng so fasL LhaL lL cannoL be meL by
Lhe economy's producLlve capaclLy and ls
Lhus llable Lo cause or fuel lnflaLlon
lL ls Lhe condlLlon of Loo much money chaslng
Loo few goods'
yper|nf|at|on
8ulnously hlgh lncrease (30 or more per monLh) ln
prlces due Lo Lhe near LoLal collapse of a counLry's
moneLary sysLem renderlng lLs currency almosL worLhless
as a medlum of exchange
AlLhough hyperlnflaLlon ls caused malnly by excesslve deflclL
spendlng (flnanced by prlnLlng more money) by
a governmenL some economlsLs belleve LhaL
soclal breakdown leads Lo hyperlnflaLlon (noL vlce versa)
and LhaL lLs rooLs lle ln pollLlcal raLher Lhan
economlc causes
@he longesL lasLlng (13 monLhs) hyperlnflaLlon occurred ln
Cermany beLween AugusL 1922 and november 1923 (ln
Lhe afLermaLh of 1
sL
world war) durlng whlch prlces rose aL
an average raLe of 322 per monLh and someLlmes
doubled or even Lrebled ln a slngle day
Lconom|c orces
lacLors such as
W level of employmenL
W raLe of lnflaLlon
W raLe of lnLeresL
W demographlc changes
W flscal and moneLary
whlch deLermlne Lhe sLaLe of compeLlLlve
envlronmenL ln whlch a flrm operaLes
@hese forces affecL Lhe ouLcome of Lhe
flrms markeLlng acLlvlLles by deLermlnlng
Lhe volume and sLrengLh of demand for lLs producLs
ock to molo poestloo
Wh|ch |s more |mportant
Demand or supp|y?
Shou|d one be more |mportant than the
other?
Cou|dn't they coex|st and try to seek a
ba|ance or equ|||br|um?
Supp|y S|de C|ass|ca|
free markeL free hand
uemand supply
Demand S|de keynes|an
no free hand lnLervenLlonlsL
blg broLher govL lnfluences or lnLervene"
May be good or bad
xample
CA bans ClW deploymenL Lo cerLaln counLrles
Why ban when Lhere ls demand for ClW whlch we
can supply?
W Supposedly ln naLlonal lnLeresL Lo proLecL ClW
who are noL LreaLed well ln Lhose counLrles
ls lL rlghL Lo deprlve ClWs of [ob so LhaL Lhey can
feed Lhelr famllles?
W lf free markeL Lhen lL ls an ClW cholce lf he
wanLs Lo Lake a rlsk
CovL ralses Larlffs or lmporL Lax Lo proLecL local buslness from
unfalr compeLlLlon
lmporLs cosL ls less as able Lo produce more efflclenLly Lhan
local producers
uL as counLry needs Lo develop local producLlon musL erecL
Lrade barrlers (Larlffs lmporL Lax lmporL quoLas) Lo allow
local producers Lo have Llme Lo caLch up and be aL par or
equal Lo forelgn producers
Local producLlon provldes employmenL for own people
Cf course consumers wlll proLesL as have Lo pay hlgher prlce
for lmporLed producLs or are forced Lo buy local producLs
LhaL may be lnferlor Lo lmporLed ones
lf free markeL Lhen counLry loses no [obs for locals
et us now discuss
ggregate Demand
and
ggregate Supp|y
ggregate Supp|y
@oLal of
all goods and servlces (lncludlng exporLs an
d lmporLs) supplled aL every prlce level
wlLhln a naLlonal economy durlng a
glven perlod
also called LoLal ouLpuL
ggregate Demand
@oLal level of demand for deslred producLs
(goods and servlces) (aL any Llme by
all groups wlLhln a naLlonal economy) LhaL makes
up Lhe Cu
AggregaLe demand ls Lhe sum of consumpLlon
expendlLure lnvesLmenL expendlLure
governmenL expendlLure and neL exporLs
AggregaLe demand Cu C + l + C + (xM)
@he DS or ggregate Demandggregate Supp|y
mode| ls a macroeconomlc model LhaL explalns prlce
level and Lhrough Lhe relaLlonshlp of aggregaLe demand
and aggregaLe supply
lL ls based on Lhe Lheory of !ohn Maynard keynes
presenLed ln hls work @e Ceoetol @eoty of
mploymeot lotetest ooJ Mooey
lL ls one of Lhe prlmary slmpllfled represenLaLlons ln Lhe
modern fleld of macroeconomlcs and ls used by a broad
array of economlsLs
from llberLarlans MoneLarlsL supporLers of Lalssezfalre
such as MllLon lrledman Lo osLkeyneslan supporLers
of economlc lnLervenLlonlsm such as !oan 8oblnson
@he convenLlonal aggregaLe supply and demand model ls
ln acLuallLy a keyneslan vlsuallzaLlon LhaL has come Lo
be a wldely accepLed lmage of Lhe Lheory
W @he Classlcal supply and demand model
whlch ls largely based on Say's Law LhaL supply
creaLes lLs own demand deplcLs Lhe aggregaLe
supply curve as belng verLlcal aL all Llmes (noL
[usL ln Lhe longrun)
L|bertar|an|sm
hllosophlcal prlnclple LhaL suggesLs LhaL a governmenL's
lnvolvemenL ln clvll economlcal and soclal maLLers should be
llmlLed and LhaL Lhe lssues should be seLLled amongsL clvlllans
LlberLarlanlsm seeks Lo provlde freewlll parLlclpanLs Lhe ablllLy Lo
make declslve declslons wlLhouL Lhe governmenL deLermlnlng
or lnfluenclng Lhe ouLcome as long as lL does
noL harm oLher lndlvlduals
LlberLarlanlsm ls based on Lhe bellef LhaL each lndlvldual owns
every aspecL of Lhelr llves and Lhus should have Lhe ablllLy
Lo conLrol lL
LlberLarlans sLrongly belleve LhaL Lhrough Lhese shared prlnclples
Lhey are able Lo esLabllsh a more frulLful and peaceful socleLy
LlberLarlanlsm Lraces lLs rooLs back Lo Lhe early 1890s as
socleLles Lrled Lo escape anLlanarchlsL laws ln lrance
,onetar|sm
School of economlc LhoughL (also called Lhe Chlcago School) whlch proposes LhaL
Lhe quanLlLy of money (Lhe money supply) ln an economy ls a key deLermlnanL
(1) of economlc acLlvlLy
(2) ln creaLlng or curblng lnflaLlon and
(3) ln managlng economlc cycles
ln conLrasL Lo keyneslan economlcs moneLarlsm malnLalns LhaL changes ln money supply
greaLly lnfluence aggregaLe demand And LhaL any aLLempL by a governmenL Lo
lncrease aggregaLedemand (by ln[ecLlng more money ln Lhe economy) wlll ln Lhe long
Lerm lf noL earller wlll lnsLead resulL ln hlgher prlces
lL ls agalnsL any aLLempL Lo conLrol economy Lhrough flscal pollcy and advocaLes supply
slde economlcs and cuLLlng governmenLspendlng
CredlLed for prevenLlng economlc depresslons for Lhe lasL 60 years lLs lnfluence on
economlc pollcy makers ls aLLrlbuLed largely Lo Lhe unlverslLy of Chlcago economlsLs
chlefly Lhe nobellaureaLe professor MllLon lrledman (19122006)
La|sseza|re
lrench for allow Lo pass or leL go
nd