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Aggregate Demand & Supply

In macroeconomics, aggregate demand (AD) is defined as the total demand for final goods and services in the economy (Y) at a given time and price level, P¹.  It is therefore the total amount of goods and services that will be purchased in the economy at all possible price levels.

The aggregate demand curve is the sum of individual demand curves for various sectors within the economy.  It shows the quantity of domestically produced goods and services that consumers, governments, foreigners, and businesses are willing to purchase. As price level decreases, more goods and services will be demanded. The converse is also true. Factors such as real interest rate changes, changes in expectations, foreign income changes, and changes in exchange rates can impact aggregate demand.

Aggregate supply is the total supply of goods and services that firms plan on selling at a given price level during a specific time period. The aggregate supply curve shows the relationship between the quantity of goods and services produced by suppliers and overall price level.  Changes such as supply shocks and price changes for resources can impact aggregate supply in the short run but long run aggregate supply will remain the same.

Aggregate supply and demand are extremely important to macroeconomics because they are used to analyze events in the past in order to better predict the future and are key to understanding economics as a whole. The aggregate supply and demand curves model the economic changes that occur in a country.

 

References:

1. Sexton, Robert; Fortura, Peter (2005). Exploring Economics.

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