BASIC THEORY OF AGGREGATE DEMAND AND SUPPLY

AGGREGATE DEMAND AND SUPPLY

Aggregate Demand :-

  • It is the the total demand for goods and services at a given time, in an economy.
  • Basically, it represents the total want by the consumers in the market at a given price level.

source: google images

  • The Aggregate Demand Curve is downward sloping from left to right, on a graph.

Aggregate Supply :-

  • Aggregate Supply is the total supply of services and goods available to the consumers at a given price in a particular economy.
  • Basically, it describes the the total output of the market that all the producers are willing to sell at a given price level.

source : google images

  • Moreover, it is represented by the Aggregate Supply Curve which is upward sloping from left to right.

Short Run & Long Run :-

Short Run —> In the short run, due to an uncertain decrease in AD, excess supply generates. As a result of which prices of goods fall, further leading increase in unemployment.

Over a longer period, shortened resource costs will cause the aggregate supply curve to shift right.

Long Run —> In the short run, due to an uncertain increase in the AD, it leads to excess demand in the economy. Thus, there will be less unemployment.

Over the long run, It will result in the decrease of the aggregate demand.

Relationship between AD and AS —>

  • Commonly known as the AD-AS Model. It is a macroeconomic model that explains price level and output through the
    relationship between Aggregate Demand and Aggregate Supply.

  • Basically, the AD-AS model shows a nation’s overall price and the quantity of services and goods produced by the nation’s suppliers.
  • Moreover, the curve of the AD-AS model is upward sloping in the short run and almost vertical in the long run.

Key points :-

  • Aggregate Supply curve slope is upwards because when the price of the output increases, all other factors remaining constant, the opportunity for additional profits encourages production.
  • Aggregate demand is the amount of total spending on on domestic goods and services in a nation or an economy.
  • Potential GDP (Aggregate Supply) or full employment GDP, is the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, etc.

BASIC INDIFFERENCE CURVE ( ECONOMIC GOODS)

PERFECT COMPETITION A MARKET THAT DOESNT EXISTS

 

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