This document discusses key concepts related to estimating aggregate demand in an economy. It explains that while aggregate supply can meet aggregate demand in theory, estimating demand is challenging in reality. The document aims to help producers estimate demand correctly to increase profits. It also covers topics like the consumption function, savings function, marginal propensity to consume, factors affecting consumption, and how the addition of government spending affects the overall income equation.

1. DISCUSSANTS: CHRISTIAN ENSOMO
HILARION ENO III

2. WE HAVE LEARNED IN THE PREVIOUS
CHAPTERS ABOUT THE DIFFERENT
COMPONENTS OF THE NATIONAL INCOME
SUCH AS HOUSEHOLD CONSUMPTION AND
INVESTMENT AS WELL AS THE RELATIONSHIP
BETWEEN CONSUMPTION AND SAVINGS,
SAVINGS AND INVESTMENT.

3. AGGREGATE
DEMAND
CONSUMPTION
FUNCTION
SAVINGS
FUNCTION
MPC AND MPS
FACTORS AFFECTING
AGGREGATE
CONSUMPTION
QUIZ
01
02
03
04
05
06

4. AGGREGATE
DEMAND
ESTIMATION

5. IN THEORY, IT IS POSSIBLE TO SAY
THAT AGGREGATE SUPPLY CAN BE
MET BY AGGREGATE DEMAND. IN
REALITY HOWEVER, ESTIMATING
DEMAND IS NOT AS EASY AS IT LOOKS.

6. TAKE NOTE!
THIS CHAPTER IS AN ATTEMPT TO
ESTIMATE DEMAND MORE
CORRECTLY FOR THE BENEFIT OF
THE PRODUCERS WHO CAN MAKE
MORE PROFITS BY ESTIMATING
DEMAND CORRECTLY.

7. WHEN A BUSINESSMAN INVESTS OR
EXPANDS HIS PRODUCTION OR
OUTPUT, HE DOES SO BECAUSE HE
KNOWS THAT THERE IS A DEMAND FOR
HIS PRODUCT.
EXAMPLE!

8. THE
CONSUMPTION
FUNCTION

9. AS WE HAVE LEARNED IN THE PREVIOUS
CHAPTER, CONSUMPTION EXPENDITURE
IS THE LARGEST COMPONENT OF THE
NATIONAL INCOME WHICH CAN ACCOUNT
TO ABOUT 70 TO 75 PERCENT OF GNP.

10. TAKE NOTE!
CONSUMPTION DEPENDS ON MANY
FACTORS, BUT IN THE INCOME
DETERMINATION, THE CONSUMPTION
EXPENDITURE OF THE ECONOMY IS
DETERMINED MOSTLY BY ECONOMY’S
LEVEL OF DISPOSABLE INCOME.

11. TO ILLUSTRATE:

12. WE CAN THEREFORE STATE THE CONSUMPTION FUNCTION IN
A SIMPLE LINEAR EQUATION AS FOLLOWS

13. SAVINGS
FUNCTION

14. SAVING IS THE DIFFERENCE
BETWEEN CONSUMPTION
AND INCOME.

15. TO ILLUSTRATE:

16. MARGINAL PROPENSITY TO
CONSUME (MPC) AND
MARGINAL PROPENSITY TO
SAVE (MPS)

17. THERE IS AN IMPORTANT CONCEPT RELATED
TO THE CONSUMPTION FUNCTION. WE
REFER TO THE CHANGE IN THE LEVEL OF
CONSUMPTION (∆C) THAT OCCURS AS A
CONSEQUENCE OF A CHANGE IN INCOME
(∆Y). THIS RATIO, ∆C/∆Y IS KNOWN AS THE
MARGINAL PROPENSITY TO CONSUME (MPC)

18. EXAMPLE!

19. TAKE NOTE!
GENERALLY, THE VALUE OF THE MPC IS
LESS THAN ONE BECAUSE OUT OF
EVERY ADDITIONAL PESO OF INCOME
EARNED HOUSEHOLDS WILL NORMALLY
SPEND ONLY A PERCENTAGE OF THEIR
INCOME AND SAVE THE REMAINDER.

20. EXAMPLE!

21. FACTORS
AFFECTING
AGGREGATE
CONSUMPTION

22. THE PROPOSITION THAT AGGREGATE
REAL CONSUMPTION IS A FUNCTION
OF THE AGGREGATE LEVEL OF
INCOME STEMS FROM THE
REVOLUTIONARY WORK OF THE
FAMOUS 20TH CENTURY ECONOMIST,
JOHN MAYNARD KEYNES, WHO
WROTE THE BOOK, THE GENERAL
THEORY OF EMPLOYMENT,
INTERESTS, AND MONEY

23. TAKE NOTE!
“THE FUNDAMENTAL PSYCHOLOGICAL LAW… IS THAT
MEN ARE DISPOSED, AS A RULE AND ON THE
AVERAGE, TO INCREASE THEIR CONSUMPTION AS
THEIR INCOME INCREASES, BUT NOT AS MUCH AS THE
INCREASE IN THEIR INCOME.”
-JOHN MAYNARD KEYNES

24. THE PERMANENT-INCOME HYPOTHESIS
POSTULATES THAT CURRENT
CONSUMPTION IS NOT SOLELY
DEPENDENT ON CURRENT DISPOSABLE
INCOME, BUT ALSO ON WHETHER OR
NOT INCOME IS EXPECTED TO BE
PERMANENT OR TRANSITORY.

25. EXAMPLE!

26. PERMANENT
INCOME
IS COMPRISED OF
THINGS SUCH AS THEIR
LONG-TERM EARNINGS
FROM EMPLOYMENT
SUCH AS WAGES,
SALARIES, RETIREMENT
PENSIONS, AND
INCOME.

27. TRANSITORY
INCOME
COMPRISES SHORT-
TERM TEMPORARY
OVERTIME PAYMENTS.
BONUSES LIKE THE 13TH
MONTH PAY,
CHRISTMAS BONUS,
AND OTHER
PERFORMANCE
BONUSES.

28. TAKE NOTE!
LONG-TERM CONSUMPTION MAY
ALSO BE RELATED TO CHANGES IN A
PERSON’S WEALTH, IN PARTICULAR,
THE VALUE OF HIS HOUSE AND
OTHER ASSETS OVER TIME.

29. THE
MULTIPLIER

30. IN MATHEMATICS, YOU LEARNED THAT THE
MULTIPLIER IS THE NUMBER BY WHICH
THE MULTIPLICAND IS MULTIPLIED. IN
ECONOMICS AND BUSINESS, THE
MULTIPLIER BEHAVES IN THE SAME
MANNER.

31. THE MULTIPLIER IS THE NUMBER OF
TIMES MONEY HAS CHANGED HANDS
AND GENERATES INCOME.
THE MULTIPLIER

32. TO ILLUSTRATE, LET US SAY YOU HAVE A PESO IN
YOUR POCKET. THEREAFTER, YOU USE THIS PESO TO
BUY CANDY FROM A VENDOR. THE VENDOR, BECAUSE
OF WHAT YOU HAVE PAID HIM, THUS EARNS A PESO
INCOME. THE VENDOR, ON THE OTHER HAND, USES
THIS PESO TO BUY CANDY FROM A GROCERY STORE.
THIS EXAMPLE IS ILLUSTRATED IN CIRCULAR FLOW
CHART IN CHAPTER 1.
EXAMPLE!

33. TAKE NOTE!
IN ECONOMICS, THE MULTIPLIER IS OBTAINED
BY USING THE FOLLOWING FORMULA:
MULTIPLIER (K)=
𝟏
𝟏−𝑴𝑷𝑪

34. THE GOVERNMENT
AND EQUILIBRIUM
INCOME
(Y=C + I + G)

35. WHAT WILL HAPPEN TO
THE NATIONAL INCOME IF
WE ADD THE
GOVERNMENT TO OUR
EQUATION?

36. WITH THE ADDITION OF THE GOVERNMENT IN
OUR ANALYSIS, THE THEORY OF INCOME
DETERMINATION CAN NOW BE EXPRESSED IN
THE FOLLOWING EQUATION:
Y= C + I + G

37. NOW, IF WE ADD THE VALUE OF
GOVERNMENT SPENDING, WE CAN
ALREADY DETERMINE THE LEVEL OF
TOTAL SPENDING DONE BY THE
THREE SECTORS COMPRISING OUR
ECONOMY: THE HOUSEHOLDS (C), THE
INVESTMENTS (I), AND THE
GOVERNMENT (G).

38. EXAMPLE!

39. TAKE NOTE!
FULL EMPLOYMENT EQUILIBRIUM IS AN
IDEAL OBJECTIVE BECAUSE AT THIS
LEVEL OF INCOME, THERE IS NO
AVAILABLE AND USEFUL RESOURCE OF
THE ECONOMY THAT IS WASTED.

42. QUIZ TIME!
WHAT’S WITH THE AGGREGATE DEMAND OF THE
ECONOMY?
DISTINGUISH THE DIFFERENCE BETWEEN THE
FUNCTION OF MPS AND MPC.
HOW DOES GOVERNMENT CONTRIBUTION AFFECTS
THE ECONOMY’S PERFORMANCE?