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Keynesian-Economics.pptx aggregate demand and supply
1. THE KEYNESIAN CRITIQUE OF THE CLASSICAL
SYSTEM
Adam smith, credited by many as the founder of
classical economics believed the government should
intervene in economic affairs as little as possible
John Maynard Keynes asked, “If supply creates
its own demand, why are we having a
worldwide depression?”
John Maynard Keynes advocated massive government
intervention to bring an end to the Great Depression
11-30
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights
2. KEYNESIAN ECONOMICS
The Great Depression of the 1930s
Keynes and Keynesian Economics
Keynes (1936), General Theory of Employment, Interest and
Money
the capitalist economy is inherently unstable and likely to
achieve equilibrium with considerable unemployment or severe
inflation, and the possibility of persistent unemployment
C O P Y R I G H T 2 0 0 4 M C G R A W - H I L L A U S T R A L I A P T Y L T D
P P T S T / A M A C R O E C O N O M I C S 7 / E B Y J A C K S O N A N D M C I V E R
S L I D E S P R E P A R E D B Y M U N I P E R U M A L , U N I V E R S I T Y O F C A N B E R R A , A U S T R A L I A
3. EFFECTIVE DEMAND
PRINCIPLE OF EFFECTIVE DEMAND is the pillar
of keynesian theory of employment
effective demand is that level of aggregate demand at
which it is equal to aggregate supply.
effective demand is expressed by aggregate
expenditure of an economy
ad refers to aggregate demand expenditure in an
economy.
it refers to the amount that all the people of an
economy may spend on buying goods produced at a
given level of employment.
4. WHAT IS EFFECTIVE DEMAND?
In other words, effective demand is the signification of the
equilibrium between aggregate demand (C+I) and aggregate supply
(C+S).
This equilibrium position (effective demand) indicates that the
entrepreneurs neither have a tendency to increase production nor a
tendency to decrease production.
It implies that the national income and employment which
correspond to the effective demand are equilibrium levels of national
income and employment.
Unlike classical theory of income and employment, Keynesian theory
of income and employment emphasizes that the equilibrium level of
employment would not necessarily be full employment. It can be
below or above the level of fullemployment.
5. Aggregate Demand
Aggregate Supply
Interaction
of
Aggregate
Supply and
Demand
Output(GDP
)
Employment
and
Unempoyment
Prices and
Inflation
Foreign
Trade
Monetary
Policy
Fiscal Policy
Other Factors
Price leveland
Costs
Potentila
Output
Capital,
Labour,
Technology
6. ADF
Aggregate Demand Schedule or Aggregate Demand Function: It
refers to the entire table showing producer’s maximum expected
receipts from the sale of their output corresponding to various
levels of employment.
AD=f(N)
Level of Employment (in
Lakh)
Aggregate demand price
(ADP) in crore rs.
0
10
20
30
40
50
60
100
360
420
480
540
600
660
7. ADC
Aggregate Demand Curve (ADC):
It is a curve which expresses relationship between aggregate demand price
and employment.
AD
Expected
Receipts
Employment
O X
Y
8. AGGREGATE SUPPLY (C+S):
In other words, the aggregate supply is the value of final output
valued at factor cost.
The aggregate supply price is the minimum amount of money
which the entrepreneurs must receive to cover the costs of
output produced by the employment of certain number of
workers.
The aggregate supply curve, (C+S) is positively sloped indicating
that as the level of employment increases, the level of output
also increases, thereby, increasing the aggregate, supply. Thus,
the aggregate supply (C+S) depends upon the level of
employment through the economy's aggregate production
function.
9. Aggregate Supply Schedule /Aggregate Supply Function (ADF):
It is a schedule/Table which shows various amount of money which
all the producers must receive from the sale of output at
varying levels of employment.
Level of Employment Aggregate Supply Price
(crore rs)
0
10
20
30
40
50
60
0
120
240
360
480
600
720
12. AGGREGATE DEMAND EXCEEDS AGGREGATE
SUPPLY
When aggregate demand exceeds aggregate
supply the economy is in disequilibrium
Output is increased in response
Eventually, the economy approaches full capacity
followed by price increases
It appears that there are two ways to raise
aggregate supply
By increasing output
By increasing prices
By doing this, aggregate supply is raised
relative to aggregate demand and
equilibrium is restored
11-43
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights
13. AGGREGATE SUPPLY EXCEEDS AGGREGATE
DEMAND
When aggregate supply exceeds aggregate
demand the economy is in disequilibrium
Inventories rise and output is decreased
Workers are laid off, further depressing aggregate
demand as these workers cut back on their
consumption
Eventually, inventories are sufficiently depleted
In the meantime, aggregate supply has
fallen back into equilibrium with aggregate
demand
11-44
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights
14. Determination of Level of Employment and Income:
According to Keynes, the equilibrium levels of national income and
employment are determined by the interaction of aggregate demand
curve (AD) and aggregate supply curve (AS). The equilibrium level of
income determined by the equality of AD and AS does not necessarily
indicate the full employment level. The equilibrium position between
aggregate demand and aggregate supply can be below or above the
level of full employment as is shown in the curve below.
Diagram/Figure:
