PRESENTED BY -:

MOHIT
NEHA SAXENA
DEVBRAT
CHETNA
LATIKA DAHWAN
NAVEEN GOYAL
12/07/21 1
Group no 4 MEGHA
 AGGREGATE DEMAND

“Aggregate demand may be defined as the

total value that the households, firms and
government are willing to pay for the output
of the economy during a given period”

It is measured in terms of total expenditure on

the goods & services in an economy during the
period of one year.
12/07/21 2
Group no 4
 Behavior Of Aggregate Demand

AD depends upon the level of income.

Greater the level of income, greater the
purchasing power and therefore ,greater
the demand.

 There is always some minimum level of

demand even when income is zero
 The rate at which income increases
exceeds the rate at which expenditure
increases.
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Group no 4
3
 AGGREGATE DEMAND
SCHEDULE

Income (Rs. Crore) Aggregate Demand

(Rs. Crore)
0 20
10 25
20 30
30 35
40 40
50 45
60 50

12/07/21 Group no 4 4
 COMPONENTS OF AD

AD = C+ I ( in a closed economy )
AD = C + G + I + ( X – M )
{ in an open economy }

Where:
AD = Aggregate Demand
C = Household Consumption
Expenditure
G = Govt. Consumption Expenditure
I = Producer’s Investment Expenditure
X = Exports
M = Imports
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Group no 4
Household Consumption Expenditure (Ch)

The amount of money spent by the people on the

purchase of goods and services in order to
satisfy their wants directly , is called household
consumption expenditure.

Consumption expenditure mainly depends on

income . Relation between consumption and
income is called consumption function.

Ch= f ( Y )
CH = Ca + cy (where cy is mpc)
12/07/21 Group no 4 6
Marginal Propensity to consume
How much consumption rises in response to a
given increase in income depends upon MPC
MPC : It is the ratio of change in consumption
to the change in income.
Thus : MPC = c
Y
Example –
 When income rises from Rs. 1,000 crore to Rs.
1,100 crore and as a consequence the spending on
consumer goods also increases from Rs. 950 crore
12/07/21
to Rs. 1040 crore. MPC will be 0.9 or 90% 7
Group no 4
 Average Propensity to Consume
APC is the ratio of the amount of the
consumption to total income.

APC = C
Y
Example :
 The level of income Rs.1000 crore.

 Consumption expenditure Rs.750

 APC = 750 = 0.75

1000

12/07/21 Group no 4 8
MPC and APC Derivation Graph

Ch

C
Ca
Y
A
A
B
O Y0 Y1

12/07/21 Group no 4 9
 MPC AND APC BOTH ARE EQUAL
Ch
B

Consumption A
Of Household
Y

O Y0 Y1
Income

12/07/21 10
Group no 4
 MPC and APC Both Are Falling

Ch

B
Consumption
Of Household A

Ca

Q
P

O Y0 Y1

Income
12/07/21 11
 MPC Constant and APC Falling

B Ch

Consumption
A
Of Household

Ca

O Y0 Y1

Income
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Group no 4
 GOVERNMENT CONSUMPTION
EXPENDITURE (Cg)

It refers to expenditure made by the government

on the purchase of goods and services.

Government makes demand of a large number of

goods and services for various purposes .For
example-
Provision of public utility services like roads,
schools, health, and sanitation, irrigation, power
Maintenance of law and order etc
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Group no 4
INVESTMENT EXPENDITURE(I)
It refers to the expenditure that increases
the stock of capital goods like machines ,
factories, houses etc.
Investment is a function of Rate of Interest.
I =f (r)

Acc.to Peterson
“Investment expenditure includes
expenditure for
producer’s
durable equipment, new construction
12/07/21 and the changes
Groupin inventories.”
no 4
14
 CONTINUED……

Investment is of 2 types…
1. Induced Investment : Induced
investment is positively related to the
level of income in an economy.
2. Autonomous Investment : An
investment which is not influenced by
level of income is called autonomous
investment.
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Group no 4
 NET EXPORTS (X-M)
Net exports is the difference between
exports & imports of a country.

Net Exports= X-M

Exports and Imports of a country
depend upon various factors. Important
ones are exchange rates of different
countries and terms of trade in the
international market. Group no 4
12/07/21 16
 AGGREGATE SUPPLY
Aggregate supply(AS) refers to the total
value of goods and services produced
and supplied in an economy per unit of
time.
It includes both consumer goods and
producer goods.
AS=C+S;

C is the consumption and

S is the saving.
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Group no 4
 Two types of aggregate supply
Short run aggregate supply
(when prices are constant)
Long run aggregate supply
(when prices are varying)
Aggregate supply in terms of money
value:
The goods and services produced per unit
time multiplied by their respective (constant)
prices give the total value of the national
output.
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Group no 4
 Factors influencing
Consumption
Objective Factors:
Rate of interest:
Higher the rate of interest

Saving will be high

Consumption will be less

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Group no 4
 Accumulated Wealth:
The greater the accumulation of wealth greater is
generally the propensity to consume.
Distribution of Income:
If national income more unequally
distributed the lower will be the propensity
to consume.
The Consumer Credit:

If a Large number of households avail credit facility for

buying automobile, television, music system etc. then
the consumption of these goods increases.
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Group no 4
 Subjective Factors

There are following factors those are

restricting consumption expenditure.

 To build up a reserve against unforeseen

contingencies;
 To enjoy interest and appreciation .
 To enjoy sense of Interdependence;
 To satisfy pure miserliness;

12/07/21 Group no 4 21
 Relation between Aggregate Demand and
Aggregate Supply

AS
C-CONSUMPTION
C+I+S R C+I I-INVESTMENT
AS- AGGREGATE
C
B SUPPLY
Q
A Investment =savings
So,
AS = AD
0 Y1
INCOME
12/07/21 22
Group no 4
 ….Contd

AS
R
C-CONSUMPTION
C+I+S C+I
Z I - INVESTMENT
Q
C AS - AGGREGATE
B P SUPPLY

A
Investment<savings
So,

0 INCOME Y0 Y1 AS > AD
12/07/21 23
 …Contd

AS
C-CONSUMPTION
Z C+I I-INVESTMENT
C+I+S R
AS- AGGREGATE
C
B Q SUPPLY
P
A Investment > savings
So,
AS < AD
0 Y1 Y2

12/07/21 INCOME 24
 Computation of savings from AS and
AD Curve
AS
P
C+I C-CONSUMPTION
D I-INVESTMENT
U R
C
V AS- AGGREGATE
C+I+S B Q
U E SUPPLY
W
A

0 Y0 Y1 Y2 Y3

+ VE SAVINGS Saving curve

I I-INVESTMENT

0
- VE Y0 Y1 Y2 Y3
SAVINGS
12/07/21 S1 25
Group no 4
 Investment Multiplier

It is the ratio between

change in income and
change in investment

MULTIPLIER = Y/ I
WHERE;
Y – CHANGE IN INCOME
I - CHANGE IN INVESTMENT

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Group no 4
 Relation between multiplier
and MPC

The value of multiplier is in fact determine

by the MPC .
BECAUSE ;
MULTIPLIER=1/1-MPC

Higher the MPC ,greater is the size of

multiplier.
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Group no 4
 Characteristics Of Multiplier

Aggregate demand
Works in both direction
Inverse relation with MPS
Size of multiplier depends upon the size of
MPC
Size of multiplier reduced proportionate to
the leakage

12/07/21 Group no 4 28
 MULTIPLIER(Contd..)
MULTIPLIER=1/1-mpc =1/mps
HIGHER THE CONSUMPTION HIGHER
THE MULTIPER,HIGHER THE SAVING
LOWER THE MULTIPLIER.

WHEN GOVERNMENT AND ROW

SECTOR ARE INVOLVED IN AN ECONOMY
THEN MULTIPLIER
Y= A/1-C[1-t] +m
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Group no 4
 DERIVATION:
Y=Ch +Cg +I +E – M
Ch=consumption of household
Cg=consumption of government
I = Investment
E = Export
M = Import
WHERE, Ch=Ca +cY(mpc)
M= Ma+mY(mpm)
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Group no 4
 =Ca+cY+ Cg +I + E- Ma-mY

=Ca + c (Y-tY) + Cg + I +E –Ma-mY

Y= Ca +cY- ctY +Cg +I +E – Ma –mY

Y – Cy +ctY +mY =Ca +Cg + I +E –Ma.

and suppose Ca +Cg + I +E –Ma =A

SO,
Y[1-c +ct +m] = A

Y[1 – c(1-t) +m ] =A

FINALLY Y= A/ 1 – c (1- t) + m
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Group no 4
SUPPOSE A RISES

A +∆A, INCOME ALSO RISES Y + ∆Y

Y + ∆Y = A /1- c (1- t) +m + ∆A/ 1-c(1-t ) +m

∆Y = ∆A/1-c(1-t) +m

(MULTIPLIER) ∆Y/∆A =1/1-c(1- t ) +m

IMPORT MULTIPLIER ∆Y/∆A = -1/1-c(1-t) +m

NOTE: IF THERE IS CHANGE IN A DUE TO IMPORT(ie Ma)

THE MULTIPLIER WILL BE NEGATIVE
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Group no 4
12/07/21 33
Group no 4