Supply and Demand Essay

1417 WordsDec 15, 20126 Pages
Team C Aggregate Demand and Supply Models OPTION 2: ECONOMIC CRITIQUE ECO/372 October 1, 2012 Option 2: Economic Critique The aggregate demand and supply model (AS-AD Model) is an economic model that has the capabilities to account for business cycles of expansion and recession, and helps to model macroeconomic policy. Aggregate demand is the total demand of goods and services for a specific period of time. Aggregate supply is the total supply of goods and services at an overall period of time (Colander, 2010). The aggregate demand and supply model seeks equilibrium. For example, when the aggregate demand is higher, it will move the economy to equilibrium with higher levels of output and price…show more content…
This model shows that inflation rises when unemployment falls. Expectations An expectation is something that people think will happen. Expectations, especially when an economy is experiencing hard times, influence economic decisions because there is no crystal ball to predict or guarantee the future trends of the economy. Individuals often alter their expectations pertaining to the future of an economy based on the current economic condition and data available. Key economic variables such as price, income, taxes, and sales are affected by the expectations of decision makers in an economy and have the potential to change the way the economy operates. Expectations affect demand and heightened uncertainty reduces economic activity and holds down inflation. Economic expectations a person has are normally based extrapolative historically, rationally. An extrapolative expectation is based on the idea that a trend will continue. Historically based expectations are based on past events about the future and rational expectations are forward-looking expectations that use available information. Consumer attitudes and expectations are important to economic recovery because consumer spending drives 70% of economic growth ("The Conference Board", 2012). For a lagging economy to grow consumer confidence must increase. The Consumer Confidence Index

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