SAJC 2024_Circular Flow_AD_AS_Lecture Notes_Students_Print_Updated

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 CIRCULAR FLOW OF INCOME AND AGGREGATE DEMAND & AGGREGATE SUPPLY MODELS In your previous set of lecture notes, Standard of Living and Key Economic Indicators, we looked at how four key indicators are commonly used to measure an economy’s performance. In this set of notes, we will look at the models of the circular flow on income and the Aggregate Demand (AD) and Aggregate Supply (AS). These models help us understand how national income in a country is determined. The AD and AS are very important concepts as they will also be used to analyse economic problems, effects and policies subsequently. Important concepts and tools and analysis  Circular flow of income  Aggregate demand  Determinants of C, I, G and (X-M)  Aggregate Supply  Determinants of Aggregate Supply  National Output  General Price Level  Multiplier Effect Key questions to consider 1. How are households, firms, the government and the foreign sector related to each other in an economy? 2. In the circular flow of income model, why does national output equal to national expenditure? 3. How does national output change when there are changes in households, firms, the government or foreign sector’s behaviour (they buy or produce more or less)? 4. What comprises the Aggregate Demand (AD) and how is AD affected by changes in the determinants of C, I, G and (X– M)? 5. How is Aggregate Supply (AS) affected by its determinants? 6. How does the interaction between AD and AS determine the equilibrium level of national output and general price level? 7. How do changes in the components of AD have a multiplied effect on national income?

St. Andrew’s Junior College Economics Department 2024 2 Contents 1. Circular Flow of Income .......................................................................................................................................................... 3 1.1. The Circular Flow Model (2-Sector Closed Economy) .............................................................................................. 3 1.2. Withdrawals (W) ............................................................................................................................................................ 4 1.2.1. 3 forms of withdrawals: ............................................................................................................................................ 4 1.3. Injections (J) ...................................................................................................................................................................... 5 1.3.1. 3 forms of injections: .................................................................................................................................................. 5 1.4. The Circular F