July 22, 2018

We outline a simple framework that focuses on the adjustment to a new equilibrium in the aftermath of an aggregate demand shift. The new equilibrium consists of a combination of price adjustments, i.e. price increases, and quantity adjustment, i.e. employment increases. One implication of this analysis is that the split between employment and income /price increases depends on the supply elasticity and the degree of substitutability of each of the components. During periods of rising demand and or economic expansion, while eon average all factors experience an increase in income, the inelastic factors of production will experience a disproportionate increase in income which results in a deterioration of the distribution of income. Conversely a decline in the aggregate demand would reduce the derived demand for all the components of the supply chain and the less elastic will be able to adjust the least and thus will experience a larger decline in income. The implication being that during periods of economic slowdown when the derived demand for factors of production declines, all factor’s income declines with the less elastic declining he most. Under these conditions, the income inequality declines, and everyone is poorer. However, this is not the way we want to have equality

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