Use any of the two models analysis and compare economic issue for example tax or national healthcare. PPC; supply and demand model; the AS/AD model; perfect competition (firm and industry); or monopoly.
Consumption and Output (AS/AD Model)
Consumption is considered the engine of growth, as it intensifies economic activity in a country. Therefore, consumption is a significant component of the economy, and we learn that the fluctuation in consumption directly impacts employment and economic growth. For instance, when consumption increases in an economy, it shifts the Aggregate Demand curve to the right, which increases prices. The increase in prices acts as an incentive for firms and companies, which operate in various industries or various segments of industries. It pushes the companies to produce more, for which they hire labor (Shift in the aggregate supply curve). It shifts the demand curve or the labor to the right, which increases wage. This increase in wage acts as incentives for the labor. It reduces general employment level in an economy. Therefore, it can be said that our two selected issues/concerns, Consumption and Output can be understood through AD/AS model.
In a contrary situation, the decrease or dwindles in consumption results, decrease in prices, as Aggregate Demand Curve shifts to the left. As a consequence, the supply curve also shifts to the left to form new equilibrium, which also shifts the demand for labor the left, causing a decrease in wages and general employment level (Arnold, 2008).
Both classical and Keynesian schools of thoughts agree that changes in Aggregate Demand and Aggregate Supply are temporary and the economy’s long-run supply curve remains the same. Recently, during the economic recession, of 2007, economies around the world took measures to increase both investment and consumption. For instance, the United States adopted expansionary monetary and fiscal policy, to increase both investment and consumption. The expansionary monetary policy increased prices and consumption, whereas the expansionary fiscal policy increased employment. Therefore, it can be said that consumption can directly impact employment, as it shifts demand and supply curve for labor (Blanchard, Dell’Ariccia, & Mauro, 2010).
Consumption affects both Aggregate Demand and Aggregate Supply. However, from the study of the subject, we learn that Aggregate Demand is directly affected by consumption, whereas Aggregate Supply is indirectly affected. For an economy both are core concerns and fluctuation, in aggregate demand or supply becomes an issue. Aggregate Demand represents the overall consumption, in an economy; whereas Aggregate Supply is considered the actual output (not the potential output).
Source: Economic Online (2016). Aggregate Supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html
Aggregate Demand
In this figure, we see that in the short-run, aggregate demand has shifted to the right, from AD to AD1. This shift has increased prices from the equilibrium price Pe to P1. It depicts than when Aggregate Demand Shifts the prices are affected, which acts as an incentive, if the shift is to the right, for the industries/firms. For this reason, Aggregate Demand is a concern and becomes an issue during the recession. In the nutshell Consumption, which is represented by the AD, affects prices that bring changes in output (Mankiw, 2016).
Aggregate Supply
The increase in prices, as prices in the figure, has excited firms to enter the industry, which will initially expand the supply curve and eventually set an equilibrium price and Output. Aggregate Supply, therefore we can say, primarily depends upon a shift in Aggregate Demand and it is the shift in demand which pushes aggregate supply curve outwards. However, the supply-side economists argue that when there is increasing supply, more labor is employed, which increases consumption. However, this argument is weak. In a nutshell, Aggregate Supply determines Output, which is strongly influenced by prices.
Comparison& Similarities
Aggregate Demand is in fact manifestation of consumption, and Aggregate Supply is positively correlated with it. The similarity between the two is that both represent consumption and output at the macro-level and the difference between the two is that one represents the supply-side, whereas the other represents the demand side. Both must be equal to ensure an equilibrium level of price and output in an economy.
References
Arnold, R. A. (2008). Macroeconomics. Cengage Learning.
Blanchard, O., Dell’Ariccia, G., & Mauro, P. (2010). Rethinking macroeconomic policy. Journal of Money, Credit and Banking, 46(16), 199-215.
Mankiw, N. G. (2016). Principles of Microeconomics. Cengage Learning.
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