Aggregate Demand vs.

Micro Demand Curve

Aggregate Demand -used in Macroeconomics -represents the total quantity of all goods and services demanded by the economy at different price levels. Aggregate Demand Curve Shifters 1. Wealth Effect -as the price level rises, the wealth of the economy, as measured by the supply of money, declines in value because the purchasing the power of money falls. As buyers become poorer, they reduce their purchases of all goods and services. (the curve shifts to the left) 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. (the curve shifts to the right) 2. Interest Rate Effect -as the price 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. -if interest rate were to fall: the curve shifts to the right -if interest rate were to rise: the curve shifts to the left 3. Net Exports Effect -as the domestic price level rises, foreign made goods become relatively cheaper so that the demand for imports increases. However, the rise in the domestic price level also means that domestic-made goods are relatively more expensive to foreign buyers so that the demand for exports decreases. When exports decreases and imports increase, net exports (exports-imports) decreases. -more imports, exports: the curve shifts to the left. -less imports, more exports: the curve shifts to the right. Micro Demand Curve -used in Microeconomics. -graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. Micro Demand Curve Shifters 1. Changes in disposable income 2. Changes in taste and preference 3. Changes in expectations 4. Changes in price of related goods (substitutes and complements) 5. Population size and composition  Circumstances for the curve to shift to the right: -increase in price of a substitute -decrease in price of complement -increase in income if good is a normal good -decrease in income if good is an inferior good  Circumstances for the curve to shift to the left: -decrease in price of a substitute -increase in price of a complement -decrease in income if good is normal good -increase in income if good is an inferior good  The aggregate demand curve, like the micro demand curve, is downward sloping implying that there is an inverse relationship between the price level and the quantity demanded of real GDP but one cannot explain the downward slope of the aggregate demand curve using the same reasoning given for the downward-sloping of individual product demand curves.