Aggregate Demand and Aggregate Supply Session-4
Aggregate Demand <ul><li>Other things equal, the amount consumers are willing to buy at a given price level </li></ul><ul>...
Components of Aggregate Demand <ul><li>Consumption Demand (C ) </li></ul><ul><li>Investment Demand (I ) </li></ul><ul><li>...
<ul><li>Aggregate Demand thus made of </li></ul><ul><ul><li>Private Sector spending </li></ul></ul><ul><ul><li>Government ...
Consumption Demand <ul><li>Aggregate expenditure on Current Consumption of final goods and services. </li></ul><ul><li>Exp...
Marginal Propensity to Consume (MPC) <ul><li>Change in consumption expenditure in response to change in disposable income ...
Disposable Income <ul><li>Divided into </li></ul><ul><ul><li>Consumption </li></ul></ul><ul><ul><li>Savings </li></ul></ul...
Aggregate Consumption Expenditure <ul><li>Desire to have a smooth consumption throughout our lifetime </li></ul><ul><li>Li...
<ul><li>People try to maintain highest smooth consumption path they can get </li></ul><ul><li>Derived from people’s expect...
Fluctuations in Consumption demand <ul><li>Changes in real disposable income </li></ul><ul><li>Changes in personal tax rat...
Investment Demand <ul><li>Aggregate Investment Expenditure is for purchase of new assets which will help in production of ...
Capital Stock <ul><li>Rupee value of new plants, capital equipment, machinery etc. at a given point of time.  </li></ul><u...
Importance of investment demand <ul><li>Subject to wider fluctuations and hence more volatile than consumption demand. </l...
Determinants of Aggregate Investment Spending <ul><li>Expected permanent increase in output </li></ul><ul><ul><li>Based on...
<ul><li>Determinants of Costs </li></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Depreciation </li></ul></ul>...
<ul><li>Given a rental cost of capital , higher the expectations about future output growth, higher would be the demand fo...
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  1. 1. Aggregate Demand and Aggregate Supply Session-4
  2. 2. Aggregate Demand <ul><li>Other things equal, the amount consumers are willing to buy at a given price level </li></ul><ul><li>Total demand for goods and services for a given price level </li></ul>
  3. 3. Components of Aggregate Demand <ul><li>Consumption Demand (C ) </li></ul><ul><li>Investment Demand (I ) </li></ul><ul><li>Government expenditure (C and I by Government) </li></ul><ul><li>Net Exports (X) minus Imports (M) </li></ul>
  4. 4. <ul><li>Aggregate Demand thus made of </li></ul><ul><ul><li>Private Sector spending </li></ul></ul><ul><ul><li>Government sector spending </li></ul></ul><ul><ul><li>External sector spending </li></ul></ul><ul><li>This spending happens on </li></ul><ul><ul><li>Consumption Goods and Services </li></ul></ul><ul><ul><li>Investment Goods and Services </li></ul></ul>
  5. 5. Consumption Demand <ul><li>Aggregate expenditure on Current Consumption of final goods and services. </li></ul><ul><li>Expressed as a positive relation between Aggregate Consumption and Disposable Income </li></ul>
  6. 6. Marginal Propensity to Consume (MPC) <ul><li>Change in consumption expenditure in response to change in disposable income </li></ul>
  7. 7. Disposable Income <ul><li>Divided into </li></ul><ul><ul><li>Consumption </li></ul></ul><ul><ul><li>Savings </li></ul></ul><ul><li>1 – MPC will give us the marginal propensity to save (MPS) </li></ul><ul><ul><li>MPS highlights the level of saving in the economy </li></ul></ul>
  8. 8. Aggregate Consumption Expenditure <ul><li>Desire to have a smooth consumption throughout our lifetime </li></ul><ul><li>Lifetime consumption path depends on lifetime income </li></ul><ul><ul><li>Income we receive from our work </li></ul></ul><ul><ul><li>Income we expect to receive from our wealth </li></ul></ul><ul><li>Distinction between Permanent and Transitory Income </li></ul><ul><li>Savings </li></ul>
  9. 9. <ul><li>People try to maintain highest smooth consumption path they can get </li></ul><ul><li>Derived from people’s expectations about permanent lifetime income both from work and wealth </li></ul><ul><li>Current and past income from wealth and work play an important role in people’s expectations about lifetime income. </li></ul>
  10. 10. Fluctuations in Consumption demand <ul><li>Changes in real disposable income </li></ul><ul><li>Changes in personal tax rates </li></ul><ul><li>Changes in Interest rates </li></ul><ul><li>Erosion of wealth due to unexpected happenings. </li></ul>
  11. 11. Investment Demand <ul><li>Aggregate Investment Expenditure is for purchase of new assets which will help in production of future goods and services. </li></ul><ul><ul><li>Purchase new machinery </li></ul></ul><ul><ul><li>Expenditure on setting up of new plant </li></ul></ul>
  12. 12. Capital Stock <ul><li>Rupee value of new plants, capital equipment, machinery etc. at a given point of time. </li></ul><ul><li>Change in capital stock over a period of time constitutes investment. </li></ul>
  13. 13. Importance of investment demand <ul><li>Subject to wider fluctuations and hence more volatile than consumption demand. </li></ul><ul><li>Affects production capacity and thus the long term growth potential of the economy. </li></ul>
  14. 14. Determinants of Aggregate Investment Spending <ul><li>Expected permanent increase in output </li></ul><ul><ul><li>Based on current trends </li></ul></ul><ul><li>Investment in capital stock happens if the investors feel that they can sell more at a later date. </li></ul><ul><li>Costs of machinery and expected benefits </li></ul>
  15. 15. <ul><li>Determinants of Costs </li></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Depreciation </li></ul></ul><ul><li>Determinants of benefits of investment </li></ul><ul><ul><li>Expected growth in output </li></ul></ul>
  16. 16. <ul><li>Given a rental cost of capital , higher the expectations about future output growth, higher would be the demand for investment </li></ul><ul><li>Given a level of expectation about output growth, the lower the rental cost of capital, the larger would be the demand for investment and vice versa </li></ul>

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