Aggregate Demand and Aggregate Supply Swapan Preet Singh WMG-242013
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Aggregate Demand and Aggregate SupplySwapan Preet SinghWMG-242013
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
Aggregate Demand
Output
Pric
e Le
vel
GDP=C+I+G+NX
0
Wealth Effect on Aggregate Demand
Aggregate Demand 1
Aggregate Demand2
Output
Pric
e Le
vel
Case 1 Case 20
20
40
60
80
100
120
140
Wealth Vs Consumption
Wealth Consumption
P2
P1
0 20 40 60 80 100 120 140
40
60
60
40
Consumption Vs Saving
Price Level Savings Good & Services
Savings/Interest Rate EffectPrice Level Amount
Spent on Goods
Savings Supply of Money for Lending
Interest rates
Demand
↑ ↑ ↓ ↓ ↑ ↓
↓ ↓ ↑ ↑ ↓ ↑
Savings/Interest Rate Effect
P2
P1
0 20 40 60 80 100 120 140
40
60
60
40
Consumption Vs Saving
Price Level Savings Good & Services
Aggregate Demand 1
Aggregate Demand2
OutputPr
ice
Leve
l
Will aggregate demand increase or Decrease?
1. A significant Boom in stock market?
2. A decrease in Govt. Spending?
↑ C ↑ AD
↓ G ↓ AD
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)
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Supply
Output
Pric
e Le
vel
Decrease in Ag-gregate supply
Increase in Aggre-gate supply
Will aggregate supply increase or Decrease?
1. A significant increase in Wages?
2. An Increase in physical Capital?
3. Decrease in tax on producers?
↑ Costs ↓ AS ↑ Productivity ↑ AS
↑ Money ↑ AS
AD-AS Equilibrium
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Pe
Qe
AD-AS Curve (Effect of AD curve shift)
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Pe
Qe
P1
Q1
P2
Q2
P ↑Q ↑
P ↓Q ↓
AD shifts to the Right(AD Increases)
AD shifts to the Left(AD decreases)
AD-AS Curve (Effect of AS curve shift)
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Pe
Qe
P1
Q1
P2
Q2
P ↑Q ↓
P ↓Q ↑
AS shifts to the Left(AS Decreases)
AS shifts to the Right(AD Increases)
AS curve (Long Run)
Output
Pric
e Le
vel
Aggregate Supply
AD-AS Curve
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Pe
Qe
Aggregate Supply(Long Run)
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
P1
Q1
Aggregate Supply(Long Run)
P ↓ Recessionary Situation
Q ↓
Aggregate Demand
Aggregate Supply
Output
Pric
e Le
vel
Aggregate Supply(Long Run)
P2
Q2
P ↑ Inflationary Situation
Q ↑
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