Aggregate demand and aggregate supply curves (article) | Khan Academy
Aggregate supply (AS) refers to the total quantity of output (i.e. real GDP) ( Read the following Clear It Up feature to learn why the AS curve crosses potential GDP.) . aggregate demand (AD) curve shows the relationship between the price. Aggregate supply, or AS, refers to the total quantity of output—in other words, . aggregate supply curve—shows the positive relationship between price level. As such, the aggregate demand curve outlines the relationship between C(Y - T) represents consumption as a function of disposable income, defined as.
For example, the vertical and horizontal axes have distinctly different meanings in macroeconomic and microeconomic diagrams. The vertical axis of a microeconomic demand and supply diagram expresses a price—or wage or rate of return—for an individual good or service.
Interpreting the aggregate demand/aggregate supply model (article) | Khan Academy
This price is implicitly relative; it is intended to be compared with the prices of other products—for example, the price of pizza relative to the price of fried chicken. In contrast, the vertical axis of an aggregate supply and aggregate demand diagram expresses the level of a price index like the Consumer Price Index or the GDP deflator—combining a wide array of prices from across the economy.
The price level is absolute: The horizontal axis of a microeconomic supply and demand curve measures the quantity of a particular good or service.
In contrast, the horizontal axis of the aggregate demand and aggregate supply diagram measures GDP, which is the sum of all the final goods and services produced in the economy, not the quantity in a specific market. In addition, the economic reasons for the shapes of the curves in the macroeconomic model are different from the reasons for the shapes of the curves in microeconomic models.
Demand curves for individual goods or services slope down primarily because of the existence of substitute goods, not the wealth effects, interest rate, and foreign price effects associated with aggregate demand curves.
- Aggregate demand and aggregate supply curves
- Aggregate Demand (AD) Curve
Individual supply and demand curves can have a variety of different slopes, depending on the extent to which quantity demanded and quantity supplied react to price in that specific market, but the slopes of AS and AD curves are much the same in every diagram—short-run and long-run perspectives emphasize different parts of the AS curve. The intuitions and meanings of macro and micro diagrams are only distant cousins in the economics family tree.
The table below gives information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia. Where is the equilibrium price level and output level—the short-run macroequilibrium? On the other hand, as the price level falls, the purchasing power of money rises. Buyers become wealthier and are able to purchase more goods and services than before. A second reason is the interest rate effect.
As the price level rises, households and firms require more money to handle their transactions. However, the supply of money is fixed. The increased demand for a fixed supply of money causes the price of money, the interest rate, to rise. As the interest rate rises, spending that is sensitive to rate of interest will decline.
Hence, the interest rate effect provides another reason for the inverse relationship between the price level and the demand for real GDP.
The third and final reason is the net exports effect. Changes in aggregate demand. Changes in aggregate demand are represented by shifts of the aggregate demand curve. An illustration of the two ways in which the aggregate demand curve can shift is provided in Figure.
A shift to the right of the aggregate demand curve. A shift to the left of the aggregate demand curve, from AD 1 to AD 3, means that at the same price levels the quantity demanded of real GDP has decreased. Changes in aggregate demand are not caused by changes in the price level. Instead, they are caused by changes in the demand for any of the components of real GDP, changes in the demand for consumption goods and services, changes in investment spending, changes in the government's demand for goods and services, or changes in the demand for net exports.
Interpreting the aggregate demand/aggregate supply model
Suppose consumers were to decrease their spending on all goods and services, perhaps as a result of a recession. Then, the aggregate demand curve would shift to the left. Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right.
If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to the left. These are just a few of the many possible ways the aggregate demand curve may shift.