[sarita]

Becker has me totally confused right now re: the relationship between supply, demand, price levels, etc.

For Aggregate Demand (AD) Curve, I have the note that as prices go up, quantity demand goes down. This makes sense to me because as prices go up, less people want to buy.

Yet later… in an increase in demand (or positive shifts in demand), the notes say prices go up. Is the because sellers feel that they can raise prices if demand is increasing?

I know this is all common sense. Something just isn’t clicking with me… any help??

Thanks, guys!

FAR 7/3/13 - 82
BEC 8/21/13 - 82
AUD 10/2/13 - 92
REG 12/3/13 - 88

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[Anonymous]

Actually, this is not common sense at all. Normal Demand and Supply analysis is common sense. AD/AS is not common sense. “This makes sense to me because as prices go up, less people want to buy.”

That statement is wrong. That is true for a single good. The price didn't go down, the price level went down. Everything got cheaper so people have more money so they can buy more stuff “wealth effect”

Increase in demand (realize that the demand is for all Domestic good). example: Tax cuts return citizens more money, demand for all stuff goes up (ceteris paribus) price level increases

[kudawudashuda]

So basically:

1. An increase in Price will decrease Quantity Demanded.

2. An increase in Aggregate Demand (shift to the right) will increase Price.

You know #1 through common sense because if prices go up you will tend to buy less because the money you have available now will not be sufficient enough to purchase the quantity you would normally buy.

A better explanation for #2 has to deal with the money supply. If the economy is expanding, there will be a shift in Aggregate Demand to the right because there is an increase in money supply. Since there is higher employment, people are more confident about the economy, interest rates are lower, which all results to more people having money in their pockets; hence inflation goes up, which is why suppliers can charge a higher price for their goods.

REG = 58 (02-20-13), 75 (05-01-13)
AUD = 67 (05-29-13), 79 (08-29-13)
BEC = 83 (07-31-13)
FAR = 72 (10-29-13), 69 (02-27-14), 73 (04-16-14), 81(08-13-14)

Study Materials = Becker 2013 + Wiley Online Test Bank
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[Anonymous]

just be careful, the y axis is “price level” not “price”

Those are not the same thing

[Author]

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