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Economic Models - Essay Example

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The term aggregate demand and supply are economic models, which are closely associated with levels of prices and the actual production that is instrumental in the analysis of business cycle, unemployment, gross domestic production, inflation, and the stabilization policies of an economy. …
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Economic Models
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"Economic Models"

Download file to see previous pages The aggregate supply and demand model is dictated by the standard of the models in the market. This captures the level of interaction between the buyer and the seller in both the long and short-term model. In the economy, there is a great relationship between the demand and the supply in the market. The fluctuation of one greatly affects the balance of the other. For instance, it is traditionally known that whenever the level of demand is high, there would be an automatic increase in price to contain the equilibrium in the market (Cohn 2007). The case is vice versa when there is low demand. The demand of commodities in the market is low, and then the prices would be lower to attract more buyers. The AS/AD model explains this phenomenal to an understandable degree of agreement between the market dynamics. Demand, in o5ther economic terms is explained as the quantity of goods a population is willing to purchase in an economy at a particular price. On the other hand, supply is the amount a market can offer to its people. The law of the demand in a market dictates that, the higher the price, the lower the demand of goods and services in a specific market. The opportunity cost of buying the goods goes higher because people would have other preferences in their decision. It is most apparent that people would look for other alternative means when the prices in the market are not favorable. The law of supply also has a great determination in the market. This law dictates that, when the prices are high, there are high supplies in the market. This is because suppliers seek the opportunity to make more profit when the prices are high. The Aggregate supply and demand graph When the supply and the level of production are lower than the natural level, then the economy is bound to suffer. This would mean that the level of gross domestic product of a country is low. This would mean that the government would not be in a position of raising enough capital to fund its endeavors. When the level of production goes below the natural levels, the rate of unemployment would also rise. A number of people would be laid off because the government would not be in a position of maintaining. The impact of reduced GDP would further pose many challenges in the economy. People’s welfare would not be adequately looked into and the government would neglect their wellbeing. Prices of goods are bound to increase in such a situation. The prices would take the effect of the law of demand, but this would further pose challenge to the economy of the state. When the supply is low, people are not willing to pay more for the goods, and services would further make suppliers and investors hard time in supplying the economy. This is a major setback. In a situation where people are not willing to supply the market due to poor prices and at the same time, people do not have resource to buy the products in the market. The situation should not be like this in any economy. The adjustment process in the economy It is a natural phenomenon that people and situations would always resist change but rather choose to be comfortable with the normal. However, not every market is marked with an absolute degree of permanency. A time comes when things have to change. Things have to be done in a new way to enable the market of the economy to take care of the ever-increasing value and demands of humanity. In every day’s market, prices are bound to change; the quality and quantities in the market fluctuate. The first cause of the market adjustment is the determinant. The determinant of a market adjustment ...Download file to see next pagesRead More
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