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January 16, 2018 

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INCOME ELASTICITY OF DEMAND: The relative response of a change in demand to a relative change in income. More specifically the income elasticity of demand can be defined as the percentage change in demand due to a percentage change in buyers' income. The income elasticity of demand quantitatively identifies the theoretical relationship between income and demand.

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Lesson 16: Aggregate Shocks | Unit 4: Complex Shifts Page: 14 of 21

Topic: AD Increase <=PAGE BACK | PAGE NEXT=>

The case of an increase in the AD curve. Let's start at long-run equilibrium. All three curves, AD, LRAS, and SRAS, intersect at the same long-run equilibrium values, Po and Qf.
  • With a rightward shift of the AD curve, the aggregate market achieves short-run equilibrium at a higher price level and more real production.
  • The labor market imbalance causes wages and production cost to rise. The SRAS shifts leftward. It stops shifting when it intersects the new AD and the original LRAS curves for a new long-run equilibrium. The price level is even higher and real production returns to full employment.

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ECONOMIC THINKING

A way of looking at and analyzing the way the world works by comparing the cost of an action with the benefit generated. The study of economics is the process of economic thinking about issues related to the scarcity problem.

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Today, you are likely to spend a great deal of time touring the new suburban shopping complex looking to buy either a set of serrated steak knives, with durable plastic handles or a pair of blue silicon oven mitts. Be on the lookout for the happiest person in the room.
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A half gallon milk jug holds about $50 in pennies.
"Good humor is a tonic for mind and body. It is the best antidote for anxiety and depression. It is a business asset. It attracts and keeps friends. It lightens human burdens. It is the direct route to serenity and contentment."

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