Price Elasticity of Demand: Analysis Price Elasticity of Demand: Analysis 5 May Tobacco Cigarette smoking is widely recognized as the number 1 cause of cancer in the United States.
Yp in the diagram above. But because aggregate demand is volatile, it can easily fall. Keynes believed that the economy would tend to stay in a recessionary gap, with its attendant unemployment, for a significant period of time.
Similarly—though not shown in the figure—if aggregate demand increases, the economy could experience an inflationary gap, where demand is attempting to push the economy past potential output. As a consequence, the economy would experience inflation. The key policy implication for either situation is that government needs to step in and close the gap, increasing spending during recessions and decreasing spending during booms, to return aggregate demand to match potential output.
Since aggregate demand is total spending, economy-wide, on domestic goods and services, economists also refer to it as total planned expenditure. We can calculate aggregate demand by adding up its four components: In this article, we'll examine each component from the Keynesian perspective.
What determines consumption expenditure? Consumption expenditure is spending by households and individuals on durable goods, nondurable goods, and services.
Durable goods are things that last and provide value over time, such as automobiles. Nondurable goods are things like groceries—once you consume them, they are gone. Services are intangible things consumers buy, like healthcare or entertainment. Keynes identified three factors that affect consumption: For most people, the single most powerful determinant of how much they consume is how much income they have in their take-home pay.
This left-over income is also also known as disposable income, which is income after taxes. Consumer expectations about future income also are important in determining consumption. If consumers feel optimistic about the future, they are more likely to spend and increase overall aggregate demand.
News of recession and troubles in the economy will make them pull back on consumption. When households experience a rise in wealth, they may be willing to consume a higher share of their income and to save less. When the US stock market rose dramatically in the late s, for example, US rates of saving declined, probably in part because people felt that their wealth had increased and there was less need to save.
How do people spend beyond their income when they perceive their wealth increasing? The answer is borrowing. Finally, Keynes noted that a variety of other factors combine to determine how much people save and spend.
If household preferences about saving shift in a way that encourages consumption rather than saving, then aggregate demand will shift out to the right. What determines investment expenditure?Start studying Demand, Supply, Market, and the Government.
Learn vocabulary, terms, and more with flashcards, games, and other study tools. product demand function. The task of demand analysis is distinguish between changes in the quantity demanded (movements along a given demand curve) and G = Government Policy N = Number of People in the Economy W = Weather Conditions.
MELec4_5: Optimal Pricing and Elasticity Page: 8. PROJECT TOPIC- CRITICAL ANALYSIS OF THE DETERMINANT OF THE DEMAND FOR MONEY IN NIGERIA () ABSTRACT This research work examines the statistical relationship between inflation rate, gross domestic product, domestic lending, interest rate and the demand for money in Nigeria spanning from In order .
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