EBK MACROECONOMICS
EBK MACROECONOMICS
5th Edition
ISBN: 8220106773925
Author: KRUGMAN
Publisher: MAC HIGHER
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Chapter 12, Problem 7P
To determine

Concept Introduction:

Aggregate Demand Curve ( AD ): It shows how price and the quantity demanded are related to each other. The curve is negatively slopped which means that when prices rise the quantity demanded falls.

Shift in Aggregate Demand Curve: There are several factors on which the shifting of demand curve depends. Some of them are:

  • Changes in expectation: when consumers are more confident about future then AD curve shifts in the right direction and vice versa.
  • Changes in wealth: when the wealth of individual increases means real value of assets increases then the AD curve shifts in right direction and when it decreases then it shifts leftward.
  • Size of stock of physical capital: when the size of stock is small then AD curve shifts rightward and vice versa.
  • Fiscal policy: It includes government expenditure and taxes. When government expenditure is increased or taxes are decreased then AD curve shifts rightward and vice versa.
  • Monetary policy: It includes money supply changes. When money supply increases AD curve shifts rightward and vice versa.

Short Run Aggregate Supply ( SRAS ): It is a positively slopped curve in which supply increases when price rises. The reason for upward slopping is that the wages are sticky in short run due to formal or informal contracts. At higher aggregate prices, there is higher profit leading to high level of output.

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The following graph shows the downward-sloping demand curve for Oiram-46, a monopolist producing unique magic hats. The graph also shows Oiram-46's marginal revenue curve and its average total cost curve. On the following graph, use the orange point (square symbol) to indicate the profit-maximizing quantity. Use the blue point (circle symbol) to indicate the profit-maximizing price. Use the purple point (diamond symbol) to indicate the average total cost. Use the tan rectangle (dash symbol) to show Oiram-46's total revenue and the grey rectangle (star symbol) to show its total cost. PRICE (Dollars per magic hat) 2 0 20 Marginal Cost 18 ATC 16 Profit-Maximizing Quantity 14 12 Profit-Maximizing Price MC 8 Demand 02 4 6 8 10 12 14 16 18 20 QUANTITY (Magic hats per week) Based on the graph, Oiram-46's profit is equal to 5 TOTAL SCORE: 1/4 Average Total Cost Total Revenue Total Cost Grade Step 2 (to complete this step and unlock the next step)
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