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Impact of Population Growth on Aggregate Demand and Supply

Aggregate Supply(Productive capacity of an economy) and Aggregate Demand are impact by the populationg growth.

Impact on AS (Aggregate Supply)

Population growth makes more people available to work and to produce output although there is a lagged response.

Eg: High birth and death rates in China in the 1930s and 1940s led to fewer people looking for jobs in the 1950s.

Eg: Fall in Death rate and rise in borth rate in the 1950s led to number of people reaching work age beginning to rise sharply in the late 1960s and 1970s.

Impact on AD (Aggregate Demand)

Population growth affects patterns of demand and investment.

Societies with low levels of per capita income spend more on consumption than on investment.

*The faster the population grows, the more investment needed to simply maintain the existing average level of capital per member of the workforce.

Therefore, the demand for capital widening increases instead of the demand for capital deepening.

Capital Widening: Keeping per worker availability of capital constant

Capital Deepening: Making available more capital per worker

Therefore, the output per man hour may not rise which inhibits growth.

Watch more on how this affected China in the video below:

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