AD & AS

• Aggregate demand is the sum of consumption, investment, government expenditure and net exports. (AD=C+I+G+X-M)
• AD = C + I + G + (X-M)
• In the AD formula, C stands for consumption by household members, which is the amount of goods and services that households consume.
• In the AD formula, I stands for investment by firms, which is the amount of money firms spend on capital goods
• In the AD formula, G stands for government expenditure, which is the amount of money the government spends on goods and services.
• In the AD formula, X stands for exports, which is the amount of goods and services exported to another country
• Investment is when a firm spends money on capital goods to increase its capacity to produce goods and services
• The determinants of investment are Interest rates, Business confidence, corporation tax, spare capacity, level of competition, and price of capital
• Capital spending is the spending on infrastructure projects (e.g. new hospitals, new roads, and new schools)
• Current spending is the spending on the maintenance of public services (e.g. NHS, schools, key infrastructures) and the payment of public sector wages
• Welfare spending is the spending on benefits and pensions (e.g. unemployment benefits, childcare benefits, and pensions to the elderly)
• Debt interest payments is the spending of all the interest payments from governments debts
• A budget deficit is when government spending > taxation revenues (income) in a fiscal year ( in a year)
• A budget surplus is when government spending is < taxation revenues in a fiscal year (in a year)
• Factors influencing consumption include:

  • Level of disposable income
  • Interest rates
  • Consumer confidence
  • Asset prices
• The marginal propensity to consume (MPC) is the willingness of a household to spend any extra income the earn
• Aggregate supply (AS) is the total amount of goods and services that firms are willing and able to supply at a given price in a given period of time