Richard says that "first year textbooks are 'forced'" to derive an AD 
curve in a way that does not correspond to how the curve is actually (or 
"properly" or "logically") derived. He says that this is done for 
"pedagogical convenience." Can we really take this seriously? Surely, 
the purpose of deriving the AD curve in this way is misleading. The 
student who goes on to study macroeconomics must "un-learn" this way. 
And the student who does not go on is deceived into believing that she 
has learned something that she has not learned at all.

On 2/9/2011 4:39 PM, Richard Lipsey wrote:
> Robin Neil asks about the axes of the AD curve. The micro demand curve 
> can be seen as a behavioral relation in which dependent and 
> independent variables may be a valid distinction (although, as the 
> long correspondence on this matter shows, it is  a matter or how one 
> interprets this type of curve). In contrast, the macro AD curve is 
> a locus of equilibrium values for the price level (P) and real GDP 
> (Y). It shows all the combinations of these two variables for which 
> aggregate demand would be just enough to purchase that amount of real 
> output IF it were produced. One can just as well say that, given Y, 
> there is only one P the will do this job or, given P, there is only 
> one Y that we do this job. So the distinction between independent and 
> depended variables does not apply here.
> First year text books (including mine for Candida and the UK) are 
> forced to derive an AD curve verbally and before money is introduced. 
> This is best done by changing P exogenously and determining 
> the equilibrium level of Y for each chosen P. But this is only for 
> pedagogical convenience. If one is deriving the curve algebraically, 
> one lays out the equations of a simple Keynesian model (1) desired 
> aggregate expenditure (2) money demand (3) money supply and 
> two equilibrium conditions (4 ) desired expenditure to equal total 
> output and (5) the demand for money to equal its supply, and then 
> substitutes these to obtain one AD curve equation relating P and Y 
> without ever identifying P or Y as dependent or independent variables. 
> This and related matters are  discussed in much more detail in my 
> essay on AD-AS in the new book by Mark Blaug and Peter Lloyd, "Famous 
> Figures and Diagrams in Economics"
> .
> Richard G. Lipsey
> ----- Original Message -----
>
>     *From:* Robin Neill <mailto:[log in to unmask]>
>     *To:* [log in to unmask] <mailto:[log in to unmask]>
>     *Sent:* Friday, February 04, 2011 6:05 AM
>     *Subject:* Re: [SHOE] Wrt. aggregate supply and demand
>
>     Serendipitously, this morning one of my students
>     ask why the general level of prices was on the
>     vertical axis and Real GDP on the horizontal axis.
>
>     My text's explanation for the negative slope of the
>     aggregate demand curve sets  Real GDP as the
>     dependent variable.  Should it not then be on the
>     vertical axis?  Is not the same true of the
>     short run aggregate supply curve?
>
>     Anyone have an answer?
>
>     I do not think that the analysis suffers from
>     conventionally putting the general level of
>     prices on the vertical axis.
>
>
>     Robin Neill
>

-- 
Pat Gunning
Professor of Economics
Melbourne, Florida
http://www.nomadpress.com/gunning/welcome.htm