2013년 1월 31일 목요일

[Short easy or lay guides on Chapter 3 of the GT] Effective Demand, AD, AS

자료 1: Tutors on Net


※ 발췌(excerpts):
※ some adjustments of  bad English expositions and errors are tried.

Principle of Effective Demand: Aggregate Demand and Aggregate Supply

■ Introduction: The logical starting point of Keynes's theory of employment is the principle of effective demand. In a[n] entrepreneurial economy, the level of employment is based on effective demand. Thus employment[? unemployment] results from a deficiency of effective demand[,] and the level of employment can be raised by increasing the level of effective demand.

Aggregate Demand Price: “The aggregate demand price for the output of any given amount of employment is the total sum of money or proceeds which is expected from the sale of the output produced when that amount of labour is employed.” Thus the aggregate demand price is the amount of money which the entrepreneurs expect to get by selling the output produced by the number of men employed. In other words it refers to the expected revenue from the sale of output at a particular level of employment. Different aggregate demand prices relate to different levels of employment in the economy.

A statement showing the various aggregate demand prices at different levels of employment is called the aggregate demand price schedule or aggregate demand function[:] “The aggregate demand function[,]” according to Keynes, “relates any given level of employment to the expected proceeds from that level of employment.” The below tablet represents the aggregate demand schedule where it reveals that, with the increase in the level of employment[, expected proceeds] rise, and at lower levels of employment [they] decline. When 900 thousands people are provided employment[,] the aggregate demand price is $560 million , and when 250 thousand people are provided jobs it is $480 million. According to Keynes the aggregate demand function is an increasing function of the level of employment and is expressed as D=F(N), where D is the proceeds which entrepreneurs expect from the employment of N men.

Level of Employment in 1000 thousands  ;  Aggregate Demand Price (D) in Million $
4 ; 460
5 ; 480
6 ; 500
7 ; 520
8 ; 540
9 ; 560
10 ; 580

The aggregate demand curve can be drawn on the basis of the above schedule. It inclines upwards from the left to the right for the reason that[, when] the level of employment increases aggregate demand price also rises, shown as AD curve in the upcoming diagram 1.

■ Aggregate Supply Price: When an entrepreneur gives employment to a definite amount of labour, it requires certain quantities of co-operant factors like land, capital, raw materials etc. which will be paid remuneration along with the labour. Thus each level of employment involves certain money costs of production including normal profits which the entrepreneur must cover. “At any given level of employment of labour aggregate supply price is the total amount of money which all the entrepreneurs in the economy, taken together[,] must expect to receive from the sale of the output produced by that given number of men, if it is to be just worth employing them.”

In brief, the aggregate supply price refers to the proceeds necessary from the sale of output at a particular level of employment. Thus each level of employment in the economy is related to a particular aggregate supply price and these [aggregate supply prices are different] for different levels of employment. A statement showing the various aggregate supply prices at different levels of employment is called aggregate price schedule or aggregate supply function[, i]n the words of Prof. Dillard[:] “The aggregate supply function is a schedule of the minimum amounts of proceeds required to induce varying quantities of employment.” The below tablet reveals the aggregate supply schedule,

Level of Employment (N) in 100 Thousands  ;  Aggregate Supply Price (Z) in Million $
4 ; 430
5 ; 460
6 ; 490
7 ; 520
8 ; 550
9 ; 580 [? 550]
10 ; 610 [? 550]

The above table reveals that the aggregate supply price rise with the [r]ise in the level of employment. If entrepreneurs are to provide employment to 400 thousand worker, they must receive $430 million from the sale of output produced by them. (...) But when the economy reaches the level of full employment(at 800 thousand workers[),] the aggregate supply price($550, $580, %610) continues to increase but there is no further [employment.] [Aggregate supply function] is an increasing function of the level of employment and is expressed z=Φ(N), Z [being] the aggregate supply price of the output level from employing N men. (... ...)


자료 2: WikiEducator

Keynes's theory of aggregate demand

(... ...) In the following sections we discuss Keynes' concept of aggregate demand function, aggregate supply function and finally, the point of effective demand.

Aggregate Demand Function

Aggregate demand or what is called aggregate demand price is the amount of total receipts which all the firms expect to receive from the sales of output produced by a given number of workers employed. Aggregate demand increases with increase in the number of workers employed. The aggregate demand function curve is a rising curve as shown in Fig. 1.

It can be seen that total expected receipts is D1L1 at 0L1 level of employment. Total expected receipts increase to D2L2 with increase in the level of employment to 0L2. 0Lf is the full employment level. Initially the aggregate demand function(ADF) rises sharply as increase in the number of employment leads to increase in society's expenditure, thereby, increasing producer's expected sales receipts. There is no much increase in employment, income, expenditure and therefore producer's expected sales receipts as the economy reaches near full employment. The ADF curve becomes perfectly elastic (horizontal) as the economy reaches near full-employment.

Aggregate Demand in Keynes's theory of income determination is society's planned expenditure. In a laissez-faire economy it consists of consumption of expenditure(C) and investment expenditure(I). Thus AD = planned expenditure = C + I (... ...)

Aggregate Supply Function

Aggregate supply is determined by physical ad technical conditions of production. However, these conditions remain constant in the short run. As such, given the technical conditions, output in the short run can be increased only by increasing employment of labour.

Aggregate supply or what is called aggregate supply price is the amount of total receipts which all the firms must expect to receive from the sale of output by a given number of workers employed. In other words, aggregate supply price is the total cost of production incurred by producers by employing a certain given number of workers. Obviously, aggregate supply price increases with increase in the number of workers employed. The aggregate supply function curve is a rising curve and at full employment(0Lf) it becomes perfectly inelastic (vertical) as shown in Fig. 2.

It can be seen that aggregate supply price or the cost of production is S1L1 at 0L1 level of employment. It increase to S2L2 with increase in the level of employment 0L2. Initially, the aggregate supply function (ASF) rises slowly as labour is abundant thereby leading to slow increase in the cost of production. Labour cost rises sharply a the economy reaches near full-employment. The ASF therefore rises [increasingly] sharply and at full employment(0Lf) it become perfectly inelastic (vertical).

Determination of Equilibrium Level of Employment

According to Keynes equilibrium level of employment (income) in the short run is determined by the level of effective demand. The higher the level of effective demand, the greater would be the level of income and employment and vice versa. This is shown in Fig. 3.

Fig. 3 shows the ADF and ASF together. As discussed above the ADF shows the amount of total receipts which all the firms expect to receive from the sale of output produced by a given number of workers employed and the ASF shows the amount of total receipts which all the firms must expect to receive from the sale of output produced by a given number of workers employed. Entrepreneurs expand output as long as there are opportunities to make profits.

It can be seen that up to 0L level of employment, aggregate demand price is greater than aggregate supply price (ADF>ASF). Producers expect greater returns than the cost of production. As such, producer expand output up to 0L level of employment. Thus at any level of employment up to 0L, there would be expansionary tendency in the economy and therefore rise in the level of employment.

Beyond 0L level of employment, aggregate demand price is less than aggregate supply price (ADF<ASF). Producers expect less returns than the cost of production. As such, producers prefer to cut down output. Thus at any level of employment beyond 0L, there would be contractionary tendency in the economy and therefore fall in the level of employment.

At 0L level of employment aggregate demand price equals aggregate supply price (ADF=ASF). Now there is no tendency towards economic expansion or contraction. Thus 0L is the equilibrium level of employment. Point 'E' is called point of effective demand. It represents that level of aggregate demand price that is equal to aggregate supply price and thus reaches short run equilibrium position.

It can be seen that equilibrium point 'E' is established at less-than-full employment equilibrium and there is LLf amount of involuntary unemployment in the economy. It is important to note that according to Keynes this unemployment is due to deficiency of aggregate demand. At full employment level there exist a gap between the full-employment level of aggregate supply price and the corresponding level of aggregate demand price. (... ...)

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