Economics Tuition: Understanding AD-AS Model

January19, 2025
by admin

TET’s Economics Tuition Class on Understanding the AD-AS Model – Mr Koh introduced students to the Aggregate Supply (AS) curve, highlighting its vertical section as a representation of maximum productive capacity constrained by scarcity. This makes it similar to the Production Possibility Curve, which is affected by the quantity and quality of factors of production in the economy. Factors of production can be recalled through CELL – capital goods, enterprise, land and labour.

Economics Tuition: Understanding AD-AS Model (AS)

Mr Koh differentiated between short-run and long-run AS, explaining that while short-run AS can change quickly, long-run AS adjustments require time due to factors such as infrastructure development and workforce integration. Short-run AS is affected by factors influencing the cost of production in the economy. This is to be differentiated from supply factors in the J1 topic on Resource Allocation in Competitive Markets. For example, while higher price of lithium affects the cost of producing electric vehicles, this is unlikely to leave an impact on production cost in the entire economy. Instead, more wide-ranging factors such as higher wages, higher price of imported raw materials such as oil or gas, and higher taxes in the form of GST or carbon taxes are formally recognised as short-run AS factors instead.

Economics Tuition: Understanding AD-AS Model (AD)

Moving on to the Aggregate Demand (AD) curve, which includes household consumption, government spending, investment spending, and net export earnings, students need to note that while domestic spending contributes to AD, import expenditure must be subtracted from the total. This is because AD is defined as the total planned spending on final goods and services produced within the geographical boundaries of an economy. Hence, since households consume a mix of both domestically-produced and imported goods, it is important to filter out spending on imports. Likewise, when the government or investors undertake an investment project such as the construction of a new factory in Singapore, both domestic and imported components are involved. Domestic value-adds could include the work of engineering and architectural firms, while imported raw materials include sand bought from Indonesia.

Economics Tuition: Understanding AD-AS Model

Finally, students need to be familiar with the various factors affecting AD (including shifts vs movements along the AD curve). This includes

  • disposable Income, cost of Credit and the state of Expectations which affect consumption spending (ICE),
  • Interest rates, Corporate tax and the state of Expectations which affect investment spending (ICE)
  • Price-competitiveness, Income levels, Quality-competitiveness which affect net export earnings (PIQ).

Since government expenditure is affected by the government’s goals and budgets, there is no need for a separate factor here.

Conclusion

TET’s Economics Tuition Classes go beyond understanding the AD-AS model to coaching students on effective and intuitive essay writing structures. To learn more, book a trial class with us here.

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