Economics and Statistics

Production possibilities curve (PPC): an economic model that depicts the trade-off an individual agent, or a country has when it allocates its resources between two goods or services. PPC models scarcity because only a specific amount of the two goods can be produced and consumed at any point on the curve. A country, or individual can produce/ consume efficiently if they are on the curve. They can produce and consume anywhere inside its PPC, but they would be under utilizing their resources. PPC models opportunity cost, by showing how much one good must be given up in order to produce one additional unit of the other good. An individual PPC: The PPC below shows the relationship between the amount of time spent on relaxing and working in a day. At point A, the individual is willing work 5 hours and relax for 19 hours. This choice involves an opportunity cost which is the benefit she would have gained by working more and relaxing less (and vice versa...). At point B, the individual i...

Real output and price level in the AD/AS model: The short run equilibrium in the AD/AS model, is when the  intersection between the short run aggregate supply curve and the aggregate demand curve determines the level of output and price level.          This short equilibrium output can be compared to the full-employment (i.e long run equilibrium) output by adding the long run aggregate supply curve in the graph.  If the difference between the short run equilibrium output and full employment output is negative than we have a recessionary gap. This could be caused by a decrease in households' consumption, a fall in private investments, or a decrease in government spending. If the difference is positive, we have an inflationary gap, where the short run equilibrium output is bigger than its full employment output. This can be caused by an increase in households expenditures, expansionary fiscal policy, etc... If the gap is zero, this means that t...

Determinants of aggregate supply: In the short run, a change in AD will cause output to change and price level to change. In the long run a change in AD will result in a change in price level only. Shifts in SRAS: The SRAS will shift to the left if there an increase in the costs of productions. This includes: A wage increase, this can be achieved by strong labor unions, higher minimum wage, and a decrease in the labor force. An increase in business taxes will increase costs, thereby shifting the SRAS to the left. A general increase in input costs. Just as the previous point, this will increase the cost of production, shifting the SRAS to the left. An increase interest rates, it is more expensive to replace machines (K), this will push to SRAS to the left. An increase in costs of production is known as a negative supply shock, which causes the SRAS curve to shift to the left, increasing the equilibrium price level, and reducing the equilibrium output. The SRAS will shift to the...

Long-run aggregate supply (LRAS) refers to the level of output of a nation's producers in response to a change in the price level in a period of time over which wages  and other costs of production are flexible. In the long-run, workers will demand higher wages caused by an increase in aggregate demand and inflation, or will take lower wages in response to a decrease in aggregate demand, deflation, and rising unemployment. In the long-run, output will return to its full-employment level as the costs of production adjust to the level of demand in the economy. The LRAS curve is vertical and intersects the AD curve at its full employment level (NRU). This reflects the idea that labor market has settled into equilibrium, there is a quantity of goods produced in the economy, that is independent of the price level. Any change in the AD will not effect the national output, it will only effect the level of inflation/ deflation. A fall in AD is caused by a decrease in the following variable...