Why is 'the general level of prices' considered AD and AS factors?

[corza000]

Why is 'the general level of prices' considered AD and AS factors in the current study design? I would imagine that would shift the curve because that determines the curve itself (y axis)?

Thanks

[zofromuxo]

'The general level of prices' are considered AD and AS factors because they can affect both.

Eg 1: The general level of prices for a product decreases
-This means that the demand curve will shift to the right because the of the Law of Demand [When a price falls, demand increase]
-This means that the supply curve will expand to meet increase demand as at the current level it is at a shortage from the general level of prices for a product.

Eg 2: The general price level for a product increases
-This means the supply curve will shift to the right because of the Law of Supply [When prices rise, supply increase].
-This means that the demand curve will contract as less consumers can afford this increase in price.

[oJL8A99A]

This means that the demand curve will shift to the right because the of the Law of Demand [When a price falls, demand increase]

Wouldn't it be a movement (expansion) of the demand curve rather than a shift because it's a price factor though? As an expansion of the AD curve will increase the quantity demanded.

[DoctorTwo]

Wouldn't it be a movement (expansion) of the demand curve rather than a shift because it's a price factor though? As an expansion of the AD curve will increase the quantity demanded.

^ That's what I thought. I was taught that changes in price only cause movements along the demand curve, whereas factors other than price (eg. changes disposable income or interest rates) cause a shift in the demand curve.

[zofromuxo]

Wouldn't it be a movement (expansion) of the demand curve rather than a shift because it's a price factor though? As an expansion of the AD curve will increase the quantity demanded.

^ That's what I thought. I was taught that changes in price only cause movements along the demand curve, whereas factors other than price (eg. changes disposable income or interest rates) cause a shift in the demand curve.

I too think agree with you both, but corza000 is also correct that the current VCE Economics study design lists general price level as factors for both. This makes ours opinion null in this case.

[oJL8A99A]

Why is 'the general level of prices' considered AD and AS factors in the current study design? I would imagine that would shift the curve because that determines the curve itself (y axis)?

Thanks

I too think agree with you both, but corza000 is also correct that the current VCE Economics study design lists general price level as factors for both. This makes ours opinion null in this case.

I think the idea is that AD and AS should be looked at separately when it comes to the general level of prices, which is inflation. When inflation (or the general level of prices) rise, it will cause a contraction of the AD curve due to the law of demand. It can't be a shift because it's a non-price factor. You could argue that when inflation rises, AS will rise. However, a better argument could be that when inflation occurs businesses are less able to produce due to increased costs of production, as prices are rising in the economy. Therefore, a shift to the left of the AS curve would occur. Only because it's not consistent for businesses to be making more if the resources they are using in production are getting more expensive - as it's really not increasing their profit at all. The reason this argument doesn't involve a movement is because increased costs of production (as resources get more expensive) is a non-price factor. They're listed in separate dot points so I think that's how VCAA wants you to look at it. Please correct me if you feel otherwise
 

[Chelsea f.c.]

Here we focus on "shifts" for each given level of inflation or output I.e. Let's take example of oil crisis of 1980s... for each given level of output business costs increased because oil was more expensive (I.e. FOR ANY level of output inflation had increased) which is a upwards shift in supply. As GDP output was below natural level people lost jobs and were afraid to ask for pay rise so inflation fell. Inflation level continued to fall until output reached natural level.

Note each point on the curves is a level of output and inflation... when we think of a shift or shock we are talking about shifts in inflation for all levels of output.. and an example of demand is mining boom where greater exports increased output for all levels of inflation.

[corza000]

On the money Sara and Chelsea. That makes sense. A bit late to check back here but glad I did thanks.