Introduction, Lecture 1

What is Macro-economics or Why Macro-economics?

Macro-economics is concerned with the behavior of all factors in an economy. A particular economic event may be beneficial or possible for one company or an individual, but may not be either possible or beneficial for the economy as a whole.

For example, introducing a new product may be good or possible for a company but not for all companies in an industry.

When the aggregate supply curve intersects the aggregate demand of an economy we obtain the aggregate output as well as price level. This means only events that can influence aggregate demand or aggregate supply or both can change the aggregate output as well as price levels together. However, there is no common consensus among economists on how aggregate demand or aggregate supply is influenced (mechanism) and the speed with which such changes take place.

Aggregate supply

The adjective aggregate before supply here tells that it is the total supply of products and/or services of industry, sector, state or economy. The supply or output depends on two factors:

  1. Availability of Inputs (resources)
  2. Technology

Availability of Inputs (resources):

Whether firms will demand higher inputs depends on prices of inputs and prices of inputs, in turn, are influenced by the availability of resources- for example, availability of cheap labor force (L) depends on population growth, and availability of capital stock (k) depends on investment level in the economy.

As the quantity of inputs is increased, the level of output increases.

Short-run Aggregate Supply Curve:

In the short run, the Aggregate Supply Curve is upward sloping and increases with the increase in inputs.

Long run Aggregate Supply Curve:

In the long run, the Aggregate Supply Curve is vertical and shifts to right with the increase in inputs.

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