3.2 Variations in Economic Activity

• Microeconomics


  The study of individual economic units
• Macroeconomics


  The study of the economy as a whole
• Demand components


  • C
  • I
  • G
  • (X-M)
• Aggregate demand


  The total demand for all goods and services produced in an economy by consumers, firms, government and foreigners at different price levels
• Aggregate means all added together
• Demand for everything by everyone
• Shifters of Aggregate Demand


  Consumers<|>Investment<|>Government Spending<|>Net Exports
• Consumer confidence


  A measure of the optimism of consumers about their future income and future economic conditions
• If consumers feel confident in their jobs

  They are willing to spend more
• If consumers feel uncertain in their job

  Spending decreases
• COVID is an example of consumer uncertainty affecting spending
• Interest rates


  The cost of borrowing money
• If interest rates are low


  We have more money and are more willing to spend
• If interest rates increase

  Consumption will decrease
• Changes in wealth


  Changes in house prices can make consumers feel rich and want to spend more
• Changes in income tax

  Increase in money leads to an increase in consumption
• Level of Household Indebtedness


  Income will go to debt; less income is used for consumption
• Inflation Expectations


  If people think prices will rise, they tend to spend now; if they think prices will lower, they tend to spend later
• Investment


  Spending on capital goods to increase future production
• Changes in business confidence

  More people will spend more money investing in the economy when confident
• Changes in technology


  Businesses need to buy new technology to keep up with competitors
• Changes in corporate tax

  Businesses will keep more profit, leading to an increase in investment
• Government Spending


  Expenditure by the government to influence the economy
• Changes in political priorities

  Government spending to please voters
• Changes in economic priorities

  Government spending to stimulate the economy during financial crises
• The Global Financial Crisis is an example of government spending to stimulate the economy
• Net Exports


  The value of a country's exports minus its imports
• Changes in the national income of other countries

  The richer they are, the more of our stuff they will buy
• China has become significantly richer in recent decades
• Changes in exchange rates

  When the Australian dollar is more expensive, our exports become more expensive and less is sold
• Aggregate supply


  The total quantity of goods and services produced in an economy at different price levels
• Shifters in the Short Run of Aggregate Supply


  Changes in Costs of Production<|>Supply Shocks
• Changes in Costs of Production

  Changes in wages, raw materials prices, taxes/subsidies, and import prices
• Supply Shocks


  Unexpected events that affect supply, such as weather conditions or war