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Wealth effect:Wealth effect is based on psychological phenomenon that explains consumers spending habits in which a consumer spend more money on with increases in its wealth. Consumers spending powers is changes according to its wealth increases or decreases. Demand for some goods is also decreases with increasing in wealth for example consumers stop buying cheap products when their wealth increases (Hubbard and et.al., 2015). The wealth factors also effect demand in an economics.
Interest rate: According to this concept when prices of certain goods and services increases then large amount of money require but when prices of goods are decreases then less money require when less money require then consumers put his money in bank as currency in bank increases so supply of loan increases at low rate so consumers focus more on saving. The low interest rate decreases demand for investment thus prices level of goods also decreases so aggregate demand curve becomes downward sloping.
International trade effect: As decreases in interest rate domestic investment is no more profitable for local people they invest their money in foreign country to earn profit on investment (Meek, 2013). A real rate of exchange is decreases as supply of dollars increases as exports of country is also increases thus price level drops and aggregate demand is increases. So demand curve become downward sloping.
From the above graph it can conclude that when the prices of products are decreases then demand is start increases wealth effect, interest effect and international trade effect are part of aggregate demand so when prices of these factors is decreases then aggregate demand is also increases. So demand curve become downward sloping.
5) Long Run and short Run Supply Curve
Long run aggregate supply curve: In long run supply curve, it is assumed that there are no fixed factors of productions and only capital, labor and technology can affect aggregate supply curve and at this point in economy everything assumed remains constant. In long run, supply curve can be changed if production quality will be changed.
Long run supply curve is vertical: In long run supply curve is not agffect by the small changes. . LAS is vertical because at this point it shows potential output of an industry(Eichholtz, Kok and Quigley, 2013). For example, if in a country if there is rise in employment rate then the industry also raises its production even prices of inputs increases. Long run supply curve is vertical because of potential output is unaffected by prices level.
Short run aggregate supply curve: It shows relationships between price level and output. It shows actual production willingness of produce by an industry during specific period in a country.
Aggregate supply curve upward sloping: In short run, wage rate is fixed because higher prices of goods and services makes the output more profitable and industry get low price labor for their production so supply curve is becoming more upwards sloping(Stevenson, Balada-Llasat. and West, 2012). At this point, industry hires low price products to increase their profits.
From above report we conclude the all facts of economics and how does it affect economic of a country. We learn all important concept s about GDP and its relation with standards of living, long run and short run supply curve aggregate demand and its reasons of its downward sloping curve. From above report we also conclude about all important factors that can affect an economic.
Books and journals
Barberis, N. C., 2013. Thirty years of prospect theory in economics: A review and assessment. The Journal of Economic Perspectives. 27(1). pp.173-195.
Bazilian, M., Onyeji, I. and Zhengrong, S., 2013. Re-considering the economics of photovoltaic power. Renewable Energy. 53. pp.329-338.
Davis, J. B., 2013. The theory of the individual in economics: Identity and value. Routledge.
de Bekkerâ€Grob, E. W., Ryan, M. and Gerard, K., 2012. Discrete choice experiments in health economics: a review of the literature. Health economics. 21(2). pp.145-172.
Eichholtz, P., Kok, N. and Quigley, J.M., 2013. The economics of green building. Review of Economics and Statistics. 95(1). pp.50-63.
Hubbard and et.al., 2015. Essentials of Economics, 3rd edn, Pearson
Meek, R. L., 2013. Economics of physiocracy. Routledge.
Reich, P. B., 2014. The worldâ€wide ‘fast–slow'plant economics spectrum: a traits manifesto. Journal of Ecology. 102(2). pp.275-301.
Stevenson, K. B., Balada-Llasat, J. M.. and West, J., 2012. The economics of antimicrobial stewardship: the current state of the art and applying the business case model. Economics. 33(4). pp.389-397.
Tribe, J., 2015. The economics of recreation, leisure and tourism. Routledge.
Tullock, G., 2013. Economics of income redistribution. Springer Science & Business Media.