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Aggregate

Demand and
Aggregate
Supply

Contents
Aggregate Demand and AD Curve
Changes in Aggregate Demand
Aggregate Supply
AS curve (Short Run)
AD-AS Equilibrium
Effects of shift to Equilibrium
AS curve (Long Run)
AD-AS Curve (With Long Run)

Aggregate Demand

Aggregate demand shows the combination of Price Level and


Level of Output at which Good and Money Market are
Simultaneously in Equilibrium.

AD Curve is downward sloping Higher Prices reduces the


Value of the money supply which reduces the demand of
Output.

Aggregate simply means added all together.

AD-Curve

Why AD curve is downward sloping?

The AD curve shows the relationship between AD and the price level.

It is assumed that the AD curve will slope down from left to right.

This is because all the components of AD, except imports, are inversely related to
the price level.

AD-Curve
Price Level

GDP=C+I+G+NX

Output

Wealth Effect on Aggregate Demand


Price Level

Wealth Vs Consumption
140
120
100
80
60
40
20
0

Output

Case 1
Wealth

Case 2
Consumption

Savings/Interest Rate Effect


Price
Level

Consumption Vs Saving

P1

40

Amount
Spent on
Goods

Savings

Supply of
Money
for
Lending

Interest
rates

Demand

60

P2

60
40

20

40

60

80

Good & Services


Price Level

100
Savings

120

140

Savings/Interest Rate Effect


Price Level

Consumption Vs Saving

P1

40
60

P2

60
40

20

40

60

80

Good & Services


Price Level

100

120

140

Savings

Output

Will aggregate demand increase or


Decrease?
C
A significant Boom in stock market?
AD
2. A decrease in Govt. Spending? G AD
1.

Aggregate Supply

The aggregate supply curve shows the relationship between


the price level and the quantity of goods and services
supplied in an economy.

The equation for the upward sloping aggregate supply curve,


in the short run.

This is because suppliers are willing to supply more if prices go up and


vice versa.

In the long run the aggregate supply curve is a vertical line,


as output is dictated by the factors of production alone.

AS curve (Short Run)


Price Level

Price Level

Decrea
se in
Aggreg
ate
supply
Output

Increase in
Aggregate
supply

Output

Will aggregate supply increase or


Decrease?
1.

A significant increase in Wages?


Costs

2.

AS
Productivity
An Increase in physical Capital?

3.

AS
Money AS
Decrease in tax on producers?

AD-AS Equilibrium
Price Level

Pe

Q
e

Output

AD-AS Curve (Effect of AD curve shift)


AD shifts to the Right
(AD Increases)
Price Level

Price Level

AD shifts to the Left


(AD decreases)
Price Level

P1

Pe

P2

Q
e

Output

P
Q
1

Output

Q
2

Output

AD-AS Curve (Effect of AS curve shift)


AS shifts to the Left
(AS Decreases)
Price Level

AS shifts to the Right


(AD Increases)

Price Level

Price Level

P1

Pe

P2

Q
e

Output

Q
1

Output

P
Q

Output

AS curve (Long Run)


Price Level

Aggregate Supply

Output

AD-AS Curve
Price Level

Price Level

Price Level

Aggregate
Supply
(Long Run)

Aggregate
Supply
(Long Run)

Aggregate
Supply
(Long Run)

P2

Pe

P1

Q
e

Output

Recessionary
Situation

Output

Inflationary
Situation

Output