Micro Economics

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Macro Economic System and its Management.

1. Macro Economic Concerns:

• Micro vs Macro Economics.

• Major Building Blocks of Macro Economics:
1) AD & AS
2) Four Sectors: HHS, BS, GS & FTS
3) Two Markets: Commodity Market and Money Market.

• Specific issues to be addressed in Macro Economics:
o Rising Prices
o Rising Unemployment
o Falling GDP
o Balance of Payments Crisis.

• Tools of Macro Economic Policy and Management:
o Fiscal Policy
o Monetary Policy
o Other Policies: Trade, Price and Labour Policies.

2. The Key Macro Economic Concepts:

• Aggregate Supply (AS) Curve:

o Describes, for each given price level, the quantity of output firms are willing to supply.

o AS: Upward Sloping ( Firms willing to supply more output at higher prices.

P

AS

O Y
Output

o ADC: Shows the combinations of the price level and level of output at which the goods and money markets are simultaneously in equilibrium.

o ADC: Downward Sloping ( At higher prices, reduction in the Value of money supply, demand for output is reduced.

P

AD
O Y
Output

o Equilibrium level of output and the equilibrium price level.

AS

P0 E

AD

O Y
Y0Output
P0 = Equilibrium Price Level
Y0 = Equilibrium Level of Output.

o Shifts in ADC and ASC:

Case 1: A Rightward shift in ADC due to an increase in nominal money stock.

AS

P1E1
P0 E
AD1
AD

O Y
Y0 Y1Output

❖ Observe new point of equilibrium (E1) and new levels of equilibrium price (P1) and output (Y1). Case 2: A leftward shift in ASC due to oil price hike or due to drought.

P
AS1
AS
E1
P1
P0 E

AD
O Y
Y1 Y0Output

❖ Observe an increase in P and decrease in output.

• The Keynesian and Classical ASC:

o Short run horizontal ASC (The Keynesian):

P

Assumption:
Unemployment
A Sof resources

OY
Output

• The Classical vertical ASC:

P
AS AS*
Assumption: Full
employment of
resources

O Y
Y* Y**
Output

❖ ASC: Shifts right right due to growth of output overtime.

• Consider shifts in AD due to an increase in money supply (monetary expansion) and an increase in government expenditure (G) – fiscal expansion.

Case 1: The Keynesian Case:
P

( An increase in
E E1 output, but no
A S change in
AD1 price level
AD
OY
Y0 Y1 Output

Case 2: The Classical Case:
P
AS
P1 E1( An increase in
P, but no
P0 E E11 change in AD1 output
AD
OY
Y* Output
( If prices fixed(P0)→horizontal supply curve, economy would move to E11→ The Keynesian Equilibrium.

• Long run, medium run...
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