901 The ADAS Model

Screen-Shot-2011-12-28-at-1.43.38-AMIn all the previous macroeconomic videos, we have been looking at economies which have their price level fixed. Eventually, prices will have to change! Well, in our modern day, the only direction we see prices going is upwards. 🙁 But is it necessarily a bad thing? Not all the time!  It may signify strong economic growth!

So why do prices change? It’s the same reason as demand and supply!

Let’s talk about the supply side of the macroeconomic story. Remember that we talked about in microeconomics, the supply curve is the summation of all the marginal cost curves of the firms? This time, the macro version of the supply curve is called the AGGREGATE SUPPLY CURVE. That’s because we add up all the goods and services that the country is able to produce. And what determines how much we produce? You guessed it, COSTS! Therefore, the factors that affect the AS curve are similar to our MC curve: Productivity, labor wages and capital interest rates!

So what about the demand side of macroeconomics? We call that AGGREGATE DEMAND because we are summing up all the demand coming from households, firms, government and even the rest of the world! Therefore, the equilibrium in the ADAS model gives us the GENERAL PRICE LEVEL of the economy!

The moment prices change, we have entered the long run. (In the further units of Macroeconomics, you will learn that we refer to this as only the medium  run! Yes, there is a longer damn run.) The reason why monitoring prices is an excellent way of measuring time frame is because prices take time to change. That goes for wages as well!

You will also realize that when prices and wages can change, the economy does not have much of a chance to grow in the long run as well!

At the end of this video, you should be able to:

  • Derive the AD curve
  • Understand how the AS curve shifts
  • Describe the short run and long run effects on prices and wages using the ADAS model
  • Analyze effects on the economy’s price level, interest rates and growth from fiscal and monetary policies using the ISLM and ADAS model
  • Understand the bargaining procedure when prices change

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15 Comments

  1. Dayvid says:

    Regarding the description of shifting left/right, up/down. isnt it the same direction technically?

    • Quickienomics says:

      Hi Dayvid,
      It may look the same technically but it might be fundamentally wrong. Take your MC curve for example. An increase in cost should be an upward shift. It cannot be rightward because it will look like a downward shift already. Therefore, the direction is important.

  2. Dayvid says:

    thankyou for the prompt reply!

  3. Adam says:

    Lol, if u dun mind me asking, what grades did u get for ur intro to econs??

  4. Adam says:

    Wow, that’s really good! Considering that the highest score in my uni for last year’s paper is only 62.. How did u prepare for the exams? Eg: What did u read and stuffs??

    • Quickienomics says:

      Hi Adam,

      I focused more on the past year papers and I read Amos’s textbook. 🙂 You’re in your second year now?

  5. betty says:

    why dont have paradox of thrift?

  6. Mark Kruger says:

    Hi Quickie,

    I am really enjoying your work, thankyou!

    At 11:50 in this video we see the short-run rise to P1 and Y1, but straight afterwards you say that this is the situation when prices are fixed. I have seen this in the UoL Study Guide as well. How can they be fixed and changing simultaneously? My guess is that the short-run price change at this point is not really considered a structural price ‘change’ in terms of the labour market. It is more like a bit of ‘noise’ and variation due to firms being able to hire some casual staff, use overtime etc.

    Thanks again,

    Mark

  7. Romona says:

    So Gerald, do you have a solution to the problem you gave at the end of the video? took me an hour and a half (not good at all!!!!) but I came up with a sort of solution. Dunno if it is correct though so would love to compare! I could scan and send to you if you would like to check it out for me!

    Thanks!
    Romona

  8. Renuka says:

    hi there. do u have the sample solution for the question posted at the end of the video, so that I may verify my answer? thank you! 🙂

  9. rhyme says:

    thanks