Aggregate Supply and Demand

Hi, okay I know this is the A-Level forum but I think you guys will be able to help me as I've been told that the material we're covering in this course (uni, first year) is more or less the same, and I have no experience in macro economics at all and am struggling a bit!

Okay, so for my assignment I've had to choose 3 current events and analyse the initial impact of shifting aggregate demand, initial impact of shifting short run aggregate supply and the potential impact of shifting long run aggregate supply.

Where I'm struggling is where to assign the three events I've chosen. I'll outline the gist of the articles:

Inflation level hits 0, due to supermarket price wars and decreasing oil prices. Therefore helping families on budgets and wages have also increased over the past few months. http://www.theguardian.com/business/2015/mar/24/uk-inflation-hits-zero-for-the-first-time-on-record

Rising house prices in 2015. http://www.theguardian.com/money/2015/apr/09/house-prices-rise-first-quarter-2015

Employment rates hits highest level since records began. Average wages outpace inflation. Unemployment fell and average pay including bonuses was up by 2.1% and ends with this quote “This suggests that the jobs rich economic recovery is still failing to boost labour productivity, which does not bode well for long-term improvement in UK living standards, even if very low price inflation is at present helping to raise real incomes,” he said.

which i'm struggling to place in the context of what I've learnt and how low unemployment can decrease productivity - how would I represent that on an AD-AS diagram??? http://www.theguardian.com/business/2015/feb/18/uk-employment-rate-hits-highest-level-since-records-began

I thought that the inflation article is an example of aggregate demand, the house prices one an example of SR-AS and the employment one LR-AS. Is this along the right lines?

I'd really appreciate some help on this as I think I understand something but then read something new and don't any more, I just keep going round in circles!! I don't understand how I would analyse them to showthe shifts.

Also sorry about the font changes, not sure how to sort that out - I did try!
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Hello there, I'll try my best to help out.

For the first story about inflation hitting zero, a cause has been decreasing oil prices - i.e. SRAS shifts right (with the same money you can buy more inputs). If you are suggesting that real incomes are rising, because of low inflation and rising net incomes, then this could be represented by a AD shift right. It depends which effect you want to isolate - the cause of low inflation or rising real incomes in part due to low inflation.

For the second story on rising house prices, I'm not sure what macroeconomic effect there will be on the SRAS - I'm just wondering how you think house prices affect SRAS?(I'm not sure myself, that's all )

For the third story, if the point is that productivity is not increasing or even decreasing, then you could show the LRAS shifting to the left. But I'm not sure what the point concerning unemployment is though in relation to productivity - it could be the other way round, that low productivity causes lower unemployment.

Hope this helps a bit

Thanks, that's really helpful. I thought that rising prices was a factor in shifting aggregate supply curves, correct me if i'm wrong, so just attributed that to the house prices. Does that make sense?
Otherwise are there any other factors which would shift the SRAS curve?

No problem.

As aggregate supply is the total production level of the economy, only the price changes that affect business costs will change business output. So only factors affecting business costs shift the SRAS curve, e.g. changes in wages, changes in oil prices. House price changes are unlikely to affect business costs, so won't shift SRAS.

Hope this helps

Right, okay that makes more sense - probably why I was struggling with it a bit! How would you analyse the shift in the curve, other than just saying that it increases production? I'm struggling to read into it any more than that to be honest!!

Let's take lower oil prices as an example. So lower oil prices cause business costs to fall, shifting the SRAS curve to the right. Assuming you've covered equilibrium (AS and AD on the same diagram), you can show equilibrium position change from this shift in SRAS, leading to a lower price level (i.e. lower inflation) and higher real GDP (i.e. economic growth). Hope this is helpful

At the risk of sounding fairly stupid what do you mean by the equilibrium? Is that where the AS and AD lines cross?

You're right yeah - equilibrium is where AS and AD lines cross (literally where AS is equal to AD).

Hi again, would it be correct to say that due to low inflation the consumer's expenditure on goods and services has decreased thanks to lower prices thus increases demand and real GDP resulting in an increase of real wealth for consumers.

Low inflation just means prices are rising slowly, so expenditure would only fall as a % of income on goods and services if real income has increased.
I'd be careful about linking low inflation to an increase in wealth (a stock concept).

I think I might be using real income and real wealth interchangeably, is that wrong?

So, assuming real income increases (because of the low prices) would that mean expenditure increases/decreases and how would that effect the aggregate demand curve? I just seem to be going round in circles over this - I think it effects it in one way and then learn it's the opposite!

A real income increase would make you 'richer', whereas an increase in your house price would make you 'wealthier'.

If real income increases consumers can spend more, ceteris paribus, which would shift AD to the right.

Does that help?

Yes, I think so. To clarify: the low inflation rate, caused by low prices, has resulted in an increase in real income thus increasing spending/demand and shifts the AD rightwards?

That'd be the narrative to go with.