Aggregate Demand and Aggregate Supply Aggregate Demand (AD)
Module 7: Aggregate Demand and Aggregate Supply Aggregate Demand (AD) The total demand of goods and services demanded by an economy at difference prices. Downward sloping like normal demand, however normal demand focuses on an individual or small group. Aggregate demand is focused on everyone in an economy/country.
Figure 1
The vertical axis is the price level. The price level is a general price figure of all prices of goods and services in an economy. o In Australia it is measured by the Consumer Price Index (CPI). The output is normally measured as Real GDP or Output (Y). o Real GDP (Gross Domestic Product) is a macroeconomic measure of economic output for all the goods and services in an economy. Referring to Figure 1: A change in price from P1 to P2, results in more outputs (or GDP) being demanded for an economy.
How is AD modelled? How do we calculate the total demand in an economy? It is basically broken down into 5 categories, which makes up Aggregate Demand. AD = C + I + G + (X – M) o C= Consumption E.g. the total amount of spending by consumers in an economy o I= Investment E.g. the total amount of investment by consumers and businesses in an economy o G=Government spending E.g. the total amount of government spending in an economy o X=Exports E.g. the total amount of exports from an economy. o M=Imports E.g. the total amount of imports to an economy.
Shifts in AD AD can either shift up (increase) or down (decrease), depending on 5 factors (Figure 2). These five factors are: o Consumption I Higher consumption in an economy means more people are buying more goods and services, therefore AD will increase (shift up). Lower consumption in an economy means more people are buying less goods and services, therefore AD will decrease (shift down). o Investment (I) More investment (money) in technology, buildings, etc., means the aggregate demand for goods and services will increase (shift up). Less investment (money in technology, buildings, etc., means the aggregate demand for goods and services will decrease (shift down). o Government Purchase (G) Higher government spending in an economy means buying more goods and services, therefore AD will increase (shift up). Lower government spending in an economy means buying less goods and services, therefore AD will increase (shift down). o Exports (X) More exports overseas, means more demand for the economy’s (e.g. Aus’) goods and services. Therefore, AD will increase (shift up). Less exports overseas, means less demand for the economy’s (e.g. Aus’) goods and services. Therefore, AD will decrease (shift down) o Imports (-M) More imports to the economy (e.g. to Aus), means the economy is paying another economy(e.g. China) to make goods and services, therefore the AD will decrease (shift down) Less imports to the economy (e.g. to Aus), means the economy is saving its money and making its own goods and services. Therefore, the AD will increase (shift up) This is why there is a negative sign on Imports (M). Because it has a negative effect on AD. Therefore, AD = C + I + G + (X – M)
Figure 2
In the following modules, we will see how C, I, G, X, M is influenced by the Monetary Policy, Fiscal Policy, Exchange Rates, inflation, overseas markets and expectations.
***********************Other topics in full version***********************
Aggregate Supply (AS) Short run Aggregate Supply (SAS) Long run Aggregate Supply (LAS) (Y*) How is both SAS and LAS modelled? Shifts in AS AS-AD model
Figure 1
The vertical axis is the price level. The price level is a general price figure of all prices of goods and services in an economy. o In Australia it is measured by the Consumer Price Index (CPI). The output is normally measured as Real GDP or Output (Y). o Real GDP (Gross Domestic Product) is a macroeconomic measure of economic output for all the goods and services in an economy. Referring to Figure 1: A change in price from P1 to P2, results in more outputs (or GDP) being demanded for an economy.
How is AD modelled? How do we calculate the total demand in an economy? It is basically broken down into 5 categories, which makes up Aggregate Demand. AD = C + I + G + (X – M) o C= Consumption E.g. the total amount of spending by consumers in an economy o I= Investment E.g. the total amount of investment by consumers and businesses in an economy o G=Government spending E.g. the total amount of government spending in an economy o X=Exports E.g. the total amount of exports from an economy. o M=Imports E.g. the total amount of imports to an economy.
Shifts in AD AD can either shift up (increase) or down (decrease), depending on 5 factors (Figure 2). These five factors are: o Consumption I Higher consumption in an economy means more people are buying more goods and services, therefore AD will increase (shift up). Lower consumption in an economy means more people are buying less goods and services, therefore AD will decrease (shift down). o Investment (I) More investment (money) in technology, buildings, etc., means the aggregate demand for goods and services will increase (shift up). Less investment (money in technology, buildings, etc., means the aggregate demand for goods and services will decrease (shift down). o Government Purchase (G) Higher government spending in an economy means buying more goods and services, therefore AD will increase (shift up). Lower government spending in an economy means buying less goods and services, therefore AD will increase (shift down). o Exports (X) More exports overseas, means more demand for the economy’s (e.g. Aus’) goods and services. Therefore, AD will increase (shift up). Less exports overseas, means less demand for the economy’s (e.g. Aus’) goods and services. Therefore, AD will decrease (shift down) o Imports (-M) More imports to the economy (e.g. to Aus), means the economy is paying another economy(e.g. China) to make goods and services, therefore the AD will decrease (shift down) Less imports to the economy (e.g. to Aus), means the economy is saving its money and making its own goods and services. Therefore, the AD will increase (shift up) This is why there is a negative sign on Imports (M). Because it has a negative effect on AD. Therefore, AD = C + I + G + (X – M)
Figure 2
In the following modules, we will see how C, I, G, X, M is influenced by the Monetary Policy, Fiscal Policy, Exchange Rates, inflation, overseas markets and expectations.
***********************Other topics in full version***********************
Aggregate Supply (AS) Short run Aggregate Supply (SAS) Long run Aggregate Supply (LAS) (Y*) How is both SAS and LAS modelled? Shifts in AS AS-AD model
