Aggregate Demand and Aggregate

Supply

 Aggregate demand = total spending in

the economy at alternative price levels.
Aggregate supply = total output of the
economy at alternative price levels.
Changes in aggregate demand and
supply cause the equilibrium price level
and real GDP to change resulting in
business cycles.
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AGGREGATE demand

Aggregate demand is the

total demand for goods and
services in the economy.
The aggregate demand
(AD) curve is a curve that
shows the relationship
between the price level
and the quantity of real
GDP demanded by
households, firms, and the
government.
Shows the combinations of
the price and output level
at which the goods and
money markets are in
equilibrium
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Factors that Affect Aggregate

Demand
Government

Consumption

Income
Wealth
Expectations
Demographics
Taxation

Investment

Interest Rates
Technology
Cost of Capital Goods
Capacity Utilization

Spending
Net Exports

Domestic & Foreign

Income
Domestic & Foreign
Prices
Exchange Rates
Government Policy

AD = C + I + G + Xn

Why the Aggregate Demand Curve

Slopes Downward?
The reasons for its downward slope
are price-level effects:
Wealth Effect
Interest Rate Effect
International Trade Effect

Wealth Effect

Interest Rate Effect

International Trade Effect

Nonprice determinants
Nonprice determinants cause the
aggregate demand curve to shift:
Expectations
Foreign income and price levels
Government policy

Expectations

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Foreign Income and Price

Levels

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Government Policy

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Aggregate Demand and

Business Cycles

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Aggregate Supply Curve

Shows the quantity of real GDP
produced at different price levels
The AS curve describes, for each
given price level, the quantity of
output firms are willing to supply
The AS curve is upward sloping as
firms are willing to supply more at
higher prices
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Aggregate Supply

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rights reserved.

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Why the Aggregate Supply Curve

Slopes Upward?
If the price level rises while the cost of
production remain fixed, business profits
go up.
As profits rise, firms are willing to produce
more output.
As the price level rises, the quantity of
output that firms are willing to supply
increases.
The result is positively sloped supply curve
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Shape of Short-run AS (SRAS)

Curve
In the short-run, the capital stock is held
constant.
Increasing the number of workers
increases output, but at a diminishing
rate.
Diminishing returns manifest as an
ever-steeper SRAS curve as the
economy approaches maximum output.
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The Shape of the Short-Run Aggregate

Supply Curve

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The Shape of the Long-run AS

(LRAS) curve
Resource costs are NOT fixed.
The amount of capital is NOT fixed.
In the long-run, AS is set by the
production possibilities curve the
capacity of the economy and is not
affected by prices, hence it is
vertical.

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The Shape of the Long-Run Aggregate

Supply Curve

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Changes in Aggregate Supply: Non- price

determinants

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Determinants of Aggregate Supply:

Technology

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Determinants of Aggregate Supply:

expectations

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Aggregate Supply and

Business Cycles

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Shifting the Long-Run Aggregate

Supply Curve

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Aggregate Demand, Aggregate

Supply, and Business Cycles

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Aggregate Demand and Aggregate

Supply Equilibrium

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