Changes in price cause signals in the market mechanism. For example, if there is an increase in demand this will lead to a higher price and a movement along the supply curve. However, in the long run, high prices act as an incentive for firms to supply more. Therefore firms will expand their production or …
A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher …
Readers Question: What is the cause of deflation? Deflation involves a fall in the price level – a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation: A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of …
Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term. Investment means capital expenditure (e.g. purchasing machines or building bigger factory) Investment is a component of AD – AD+ C+I+G+X-M. Investment spending takes about 15% of AD; it is not as significant as consumer spending …
Demand side policies include expansionary fiscal and monetary policies. For example, the govt could increase Govt spending and lower taxes. G is a component of AD, therefore, this will cause AD to increase, there may also be a multiplier effect causing AD to increase even more than the initial effect Lower tax rates will increase …
Aggregate demand (AD) is the total demand for goods and services produced within the economy over a period of time. Aggregate demand (AD) is composed of various components. AD = C+I+G+ (X-M) C = Consumer expenditure on goods and services. I = Gross capital investment – i.e. investment spending on capital goods e.g. factories and …
Readers Question Can you tell me: Is speculation on a hot real estate market a counterexample to the law of demand or indirect evidence of it? The Law of Demand One of the first things you learn in economics is the basic law of demand – When prices rise, people buy less. When prices fall, …
In 1978, the Conservative Party hit on a fantastic election poster, Labour’s not working. Unemployment had recently hit 1.6 million or 5%. Ironically, a few years later unemployment would soon double to over 12% after the devastating early 1980s recession. But, what about 2024, is there a new epidemic of economic inactivity, people not working? …