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AS / AD REVIEW

6 supply side factors

1. Capital Equipment
2. Education/skill levels of Labour Force
3. Management
4. Size of Market/Scale of operation
5. Incentive of after-tax econ. Gain
6. Incentive of competition

Supply side determines the number of goods and services the economy can
produce.

Two measures of the Supply Side: Productivity and Capacity Output

Productivity:
- Output per worker per hour; one measure of efficiency. (depends mainly on
how hard people work.

Capacity Output:
- The max. amount of output the economy can produce without generating
excessively rapid increases in production costs and prices.
- Depends on 2 factors: 1) Size of the labour force. 2) Productivity

Average & Marginal tax rates (including calculation)

Average:
- Tax / Income x 100%

Marginal:
- Additional Tax / Additional Income x 100%

How to shift the AS curve to represent changes in the 6 factors

(These include any change in the endowments of the factors of production including
labor, capital or technology.)
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Increase in AS Decrease in AS
New raw materials Less raw materials
Lower input prices Higher input prices
Less trade barriers More trade barriers
Increased competition Less competition
Less regulations More regulations
More labor, capital or Less labor, capital, or a
better technology decrease in tech.
Increase in Education Decrease in Education

Real GDP increases, price level decreases AS ^

Real GDP decreases, price level increases AS v

Possible aggregate supply curve shifts cause:

- New raw materials - new sources of reserves for primary commodities such as
oil and gold are found. An increase in these reserves shifts the AS curves
right. However, each year the curves will shift left as some of the reserves
are used up for production.

- Input prices - the dollar cost of rents and wages paid to capital and labor. If
these costs go up relative to the price of output, then production will
decrease and we will see a decrease in AS.

- Trade barriers - quotas and tariffs enforced by an economy. With less trade
barriers in place, countries are free to focus on production of the good or
service they have a comparative advantage in. With high trade barriers, they
must produce everything themselves, including goods that they do not have
a comparative advantage in.

- Competition - has to do with the number of firms and businesses within the
economy. With more competition, more firms and businesses are producing
goods which can lead to higher levels of GDP. Also, increased competition
forces companies to be more efficient, and use resources more efficiently.
This will also cause an increase in aggregate supply.

- Regulations - have a direct impact on productivity, and more regulations hurt

the productivity of firms. For this reason, more regulation results in a
decrease for aggregate supply.

- Increases in labor, capital, or technology - increase the amount of stuff that

can be produced so aggregate supply will increase.
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- Education - plays an important role in the productivity of labor. With smarter

people, more can be produced so the aggregate supply curves will shift left.

4 Demand Side Factors (including the sub factors, saving vs. spending etc.)

1. Change in expectations (for either firms/households positive AD ^ /

negative AD v)
2. Government spending change (G^ -> AD^)
3. Monetary/fiscal policy (interest rates drop, I^ C^)
4. Currency and exchange rates

Y = C + I + G + (X M)

C = (60%)
I = (15%)
G = (20%)
X M = (5%)

Aggregate Demand: Total spending on goods & services.

Consumption:
1. Disposable income
2. Consumer confidence
3. Government policy
4. Level of wealth
5. Level of debt
6. Interest rates
7. Habit
8. Demographics

Investment:
1. Expectations of profitability
a) How close to production capacity?
b) How much are sales expected to increase in future?
2. Interest Rates

Government:
1. Policies limited by: Taxes and Borrowing. (publics willingness to accept)

Net Exports (X-M):

1. Strength of trade partner economies (especially US)
2. Exchange rate (value of CDN $)
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How to shift the AD curve to represent the changes in the 4 factors

Increase in AD
Households and firms have high
expectations for the future growth
The government increases
spending, or reduces taxes
The federal reserve lowers interest
rates
More exports (weaker currency, or
faster world GDP growth)
Decrease in AD
Households and firms have low
expectations for the future growth
The government reduces spending,
or increases taxes
The federal reserve increases
interest rates
More imports or less exports
(stronger currency or faster
domestic GDP growth)

Real GDP increases, price level increases = AD ^

Real GDP decreases, price level decreases = AD v

How to calculate disposable income

Income - Tax