Question

The concepts in this chapter are extremely important. We start putting together all of the principles and models we have previously learned, and can begin to see how different events ripple through the economy. Keep in mind that nothing ever happens in the economy alone, there are always consequences that follow every economic event. Given your new understanding of macroeconomics you should be able to predict how the economy will react in general to changes.

Aggregate demand is simply a schedule or curve that shows the various amounts of goods and services (GDP) that domestic and foreign buyers will desire to purchase at each possible price level. There is an inverse relationship between prices and the quantity of goods and services demanded, as prices increase the quantity demanded decreases, and vice versa.

Aggregate supply is a schedule or curve showing the amount of goods and services producers are willing to produce and sell at different price levels.

Equilibrium is found where the aggregate supply and aggregate demand curves intersect. It is the point where consumers and suppliers agree on a price and quantity.

You acting as a producer or a consumer are part of either AS or AD. There has been a significant amount of discussion around increasing the legal minimum wage. Considering your individual role in the economy as either a producer or consumer, please explain how you expect your production or consumption to change as the minimum wage changes come into play. Second, please show how your changed behavior will affect the overall economy. Feel free to use AD/AS graphs in your answer.

Answer 1

As a producer, I am a part of aggregate supply as aggregate supply is the sum total of all goods and services all producers are willing to supply at different price levels.

If there is an increase in minimum wage law, it will raise my cost of production since the minimum amount of wage that is to be paid to a worker has been increased. Rise in cost of production, reduces profits leading to contraction in production. Similar effect can be seen with the other producers also. Thus implementation of minimum wage law will lead to leftward shift in aggregate supply curve holding aggregate demand curve constant.

This will further lead to decrease in output and rise in general price level.

Thus due to contraction in production of individual producers, the aggregate impact at the level of the economy would be leftward shift in Aggregate Supply curve( short run AS or SRAS) leading to rise in price level which rises from OP to OP' while equilibrium output falls from OY_f to OY₀.