AGGREGATE DEMAND

AND
AGGREGATE SUPPLY
 AGGREGATE DEMAND

Is an economic measurement of the SUM of all

FINAL GOODS and SERVICES produced in an
economy, expressed as the TOTAL AMOUNT OF
MONEY EXCHANGED for those goods and
services. Since it is measured by MARKET
VALUES, it only represents total output at a
given price level and does not necessarily
represent QUALITY or STANDARD OF
LIVING.
 AGGREGATE SUPPLY

Is the TOTAL SUPPLY OF GOODS and

SERVICES an economy produces in a given
period of time. It’s the amount of goods
companies plan to sell at a time period.
Aggregate supply is the relationship between
PRICE LEVELS and the AMOUNT OF GOODS
and SERVICES.
 Short-run economic
fluctuations
In the short run, OUTPUT is determined by both
the AGGREGATE SUPPLY and AGGREGATE
DEMAND within an economy. Anything that
causes labor, capital, or efficiency to go up or
down results in fluctuations in economic output.
Economic activity fluctuates from year to year. in
some years, normal growth does not occur,
indicating a recession.
 Short-run economic
fluctuations
NORMAL GROWTH of a country is the increase
in the inflation-adjusted market value of the
goods and services produced by an economy
over time. it is conventionally measured as the
percent rate of increase in real gross domestic
product, or real GDP.
RECESSION is a period of declining real income
and rising unemployment.
DEPRESSION is a severe recession.
 Three key facts about short-
run economic fluctuations
ECONOMIC FLUCTUATIONS are IRREGULAR
and UNPREDICTABLE.
• Fluctuations in the economy are often called the
“BUSINESS CYCLE” and are IMPOSSIBLE to
predict accurately.
Most macroeconomic variables FLUCTUATE
TOGETHER.
• Real GDP measures short term changes in the
economy. most variables fluctuate together, and
they fluctuate in different amounts.
As output falls, UNEMPLOYMENT RISE.
 Changes in real GDP are INVERSELY related to
CHANGES in UNEMPLOYMENT RATE.
Meaning, during when an economic falls,
unemployment rises.
 The economy in the long-run
It is not a set period of time but rather the TIME
HORIZON needed for a producer to have
flexibility over all production decisions.
The long run is a period of time in which all
factors of PRODUCTION and COSTS are
VARIABLE. The long run is the period when the
general price level, contractual wage rates, and
expectations adjust fully to the state of the
economy. In the long run, the company can
adjust all cost.
The economy in the short-run

The short run is the time horizon over which

factors of production are FIXED, EXCEPT FOR
LABOR, which REMAINS VARIABLE. It is a
length of time which fixed condition cannot be
altered and certain decisions cannot be changed
to increase production.
 How to use the model of AD and
AS to explain economic
fluctuations
■ Economist use the model of aggregate demand
and aggregate supply to explain short-run
fluctuations in economic activity around its
long-run trend.
■ The aggregate-demand curve shows the
quantity of goods and services that households,
firms, and the government want to buy at each
price level.
■ The aggregate-supply curve shows the quantity
of goods and services that firms choose to
produce and sell at each price level
How shifts in either AD or AS
can cause recession
Causes of Recessions
A financial crisis.
■ A rise in interest rates
■ Fall in asset prices
■ Appreciation in exchange rate
■ Fiscal austerity
Recessions can also be caused by
■ Supply-side shock, e.g. rise in oil prices cause
inflation and lower spending power.
Higher oil prices would increase the cost of
production and causes the short-run aggregate
supply curve to shift to the left.
 How shifts in either AD and
AS can cause booms
Causes of Booms
■ Lower interest rates
■ Increased wages
■ Increased government spending
■ Devaluation.
■ Confidence
■ Lower tax
■ Rising house prices.
■ Financial stability.
Shifts in Aggregate Demand
Shifts in Aggregate Supply