Aggregate Supply and Demand
Aggregate supply and demand refer to the total supply and demand for goods and services in an economy. Aggregate supply represents the total amount of goods and services that firms are willing to produce at a given price level, while aggregate demand represents the total amount of goods and services that consumers are willing to purchase at a given price level. The interaction of these two forces determines the overall level of economic activity.
7 Key excerpts on "Aggregate Supply and Demand"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...An economy is in equilibrium when aggregate demand equals aggregate supply. The aggregate demand curve shows the total amount of real output that buyers will purchase at alternative price levels during a given year. Movements along an aggregate demand curve are caused by changes in the price level of the economy. Shifts in the aggregate demand curve are caused by changes in non-price factors that affect household consumption expenditures, business investment, government expenditures, and net exports of goods and services. According to the multiplier effect, a change in any one of the components of aggregate demand (consumption, investment, government spending, or net exports) will have a magnified impact on national output and income. The size of the multiplier depends on the spending and saving habits of consumers and businesses. The aggregate supply curve shows the relationship between the level of prices and amount of real output that will be produced by the economy in a given year. The aggregate supply curve is horizontal when the economy is in deep recession or depression, upward-sloping when the economy approaches full employment, and vertical when the economy achieves full employment. Changes in factors such as resource prices, resource availability, and the level of technology will cause the aggregate supply curve to shift. The model of aggregate demand and aggregate supply can be applied to the problems of recession and inflation. According to this model, decreases in aggregate demand or aggregate supply can push the economy into recession; inflation may be the result of increases in aggregate demand or decreases in aggregate supply...
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...In order to determine the equilibrium price level and equilibrium level of total output (GDP) for an open economy, we need to describe total production (or supply) of goods and services. Aggregate supply is the relationship between the total quantity of goods and services an economy produces at various price levels, holding all other determinants of production unchanged. The aggregate supply (AS) curve is a graphical representation of aggregate supply as shown in Figure 16.3. FIGURE 16.3 The aggregate supply curve Notice that the aggregate supply curve slopes upward and to the right, indicating that as the price level rises, the quantity of goods and services produced by the economy increases. If this supply curve represented the supply of a particular good, the relationship between the price of the product and the quantity produced would be clear. At higher prices, producers would be willing to supply more goods and services. However, aggregate supply represents the economy’s total production (supply) in the short run. In this case, a higher price level is necessary to induce a higher level of total production in the economy. In the case of the aggregate supply of a country, we assume that in the short run the economy’s labor force, capital stock, stock of natural resources, and level of technology are all held constant. The upward slope of the aggregate supply curve is related both to a rising demand for the output of the economy and rising unit costs as the economy starts operating closer to full employment. Unit costs tend to rise because as output expands, the prices of some inputs used in the production of final goods will begin to rise even before the economy as a whole reaches full employment. This occurs as a result of different demand and supply conditions in the various input markets...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...CHAPTER 3 Aggregate Demand, Output, and Equilibrium 1. Aggregate Demand and Supply In Chapter 1, the equilibrium of the economy was roughly described in terms of aggregate demand and supply. It was said that when the amount of money everyone wishes to spend is equal to the value of the goods and services currently being made available for purchase, the economy is in equilibrium in the sense that the situation will not itself cause changes in the general level of prices, in the level of output, or in anything else. But the concept of equilibrium implies the possibility of disequilibrium: aggregate demand may be equal to aggregate supply, but it may also be larger or smaller at any particular time. In this, there is a marked contrast with the relationship between National Expenditure and National Product, since these are identical in amount at all times and under all circumstances; they can never be said to be in equilibrium, because they can never differ. Nonetheless, the concepts defined in the previous chapter can be used to throw light on the conditions of equilibrium between aggregate demand and supply. For the time being, the notion of aggregate supply will be likened to that of National Product. This does not mean that the two are to be regarded as identical; National Product is simply a numerical measure of the flow of output, whereas the concept of supply involves the idea of volition – it is the quantity that sellers wish to sell, rather than the amount that they merely happen to have available from current production...
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...CHAPTER 1 DEMAND AND SUPPLY ANALYSIS: INTRODUCTION Richard V. Eastin Gary L. Arbogast, CFA LEARNING OUTCOMES After completing this chapter, you will be able to do the following: Distinguish among types of markets. Explain the principles of demand and supply. Describe causes of shifts in and movements along demand and supply curves. Describe the process of aggregating demand and supply curves, the concept of equilibrium, and mechanisms by which markets achieve equilibrium. Distinguish between stable and unstable equilibria and identify instances of such equilibria. Calculate and interpret individual and aggregate demand and inverse demand and supply functions, and interpret individual and aggregate demand and supply curves. Calculate and interpret the amount of excess demand or excess supply associated with a nonequilibrium price. Describe the types of auctions and calculate the winning price(s) of an auction. Calculate and interpret consumer surplus, producer surplus, and total surplus. Analyze the effects of government regulation and intervention on demand and supply. Forecast the effect of the introduction and the removal of a market interference (e.g., a price floor or ceiling) on price and quantity. Calculate and interpret price, income, and cross-price elasticities of demand, and describe factors that affect each measure. 1. INTRODUCTION In a general sense, economics is the study of production, distribution, and consumption and can be divided into two broad areas of study: macroeconomics and microeconomics. Macroeconomics deals with aggregate economic quantities, such as national output and national income. Macroeconomics has its roots in microeconomics, which deals with markets and decision making of individual economic units, including consumers and businesses...
eBook - ePubMacroeconomic Theory: A Short Course
A Short Course
- Thomas R. Michl(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...When we aggregate over all the goods, we are considering a simultaneous increase in all the prices, so that all the relative prices remain constant. That is why an aggregate demand curve cannot be formed by simply adding up all the individual demand curves. We will see that nonetheless, macroeconomic theory does suggest reasons of a purely macroeconomic nature for the existence of an aggregate demand curve, but the aggregate demand curve can be vertical or even positively sloped, even when individual demand curves have their usual negatively sloped shape. This illustrates why macroeconomics is more than an extension of microeconomics: the whole is often different from the sum of its parts. Aggregating the pricing equation over all the firms results in an aggregate pricing equation P = (1 + μ) W which, once again, tells us that as long as the wage is fixed, firms will charge the same price no matter how much demand they experience for their products. Again, it is conventional to call the horizontal line at the price given by this equation the aggregate supply curve, although it would be more accurate to call it the aggregate price curve. When we drop the assumption that wages are constant in later chapters, we will find that the aggregate supply curve may slope upward. Just as we can find the profit share at the firm level from the mark-up, so too can we find the aggregate profit share, Π/ Y, which will be equal to μ /(1 + μ) Aggregating the production function over all the firms results in an aggregate production function 4. 4 The constant y − 1, which is left implicit, has the dimension constant dollars per worker per year to ensure that the production function is dimensionally consistent. Y = N Obviously, if firms choose to expand output, they must hire more units of labor. In practice, this can be accomplished through longer hours per worker, or through hiring...
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...Just as in an individual market, an increase in aggregate demand, with aggregate supply positively sloped, would increase production, employment, and price with the last an irrelevancy in 1936, the year of the publication of Keynes’s masterpiece, The General Theory of Employment, Interest, and Money. The title of his text, particularly interest and money, implies emphasis on the use of an increase in the stock of money to drive the interest rate down thereby increasing spending on interest-sensitive products such as houses and factories, cars and assembly lines. Only at the end of The General Theory does Keynes discuss increasing aggregate demand through fiscal policy—either having the government spend more or taxing less and having consumers spend more, or both. Supply-side macroeconomics is an invention of the 1970s, a period in which inflation and unemployment were relatively high and productivity growth low. Increased aggregate supply commanded the attention of many economists because an increase in supply tends to decrease price and increase output. The most important way to accomplish this would be to somehow or another increase investment spending. A lower interest rate should do the trick, in theory. That will not be looked into here but in some depth in Chapter 14. Demand Shifts with Various Sloped Supply Functions An increase in demand, with a positive-sloped supply function, leads to an increase in price and quantity. What, however, happens if the supply function is vertical, or horizontal, or negative-sloped? Figure 3.6. Demand Increases with Vertical and Horizontal Supply The Vertical Supply Function The case of the vertical supply function is shown in frame a of Figure 3.6. It is the supply function associated with land, the factor fixed in supply. It is also the supply function of Marshall’s “market period”—a period during which there is inadequate time to change the quantity supplied...
eBook - ePub- Tom Craig, David Campbell(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...The problem is that we do not yet know what the actual price of a good or service will be. Both the demand and supply curves represent a number of possible price–quantity situations, but we do not know at what price the product will actually sell. The Equilibrium Point By comparing a product’s supply and demand curves on the same graph, we can see that there is one price that both parties (producers and buyers) ‘agree’ on. This is the point at which both the suppliers and the consumers agree. The noted Cambridge economist Alfred Marshall described the supply and demand curves as two blades of a pair of scissors. Neither blade on its own is enough to ‘cut a price’. They must both be present and known before the price can be determined. We can see how this works by looking again at the supply and demand curves for potatoes at the fruit and vegetable shop we considered earlier (Figures 17.4 and 17.11). If we look at these two curves together, we can see that at a price of 20 pennies and a quantity of 700 pounds per week, the curves intersect. This intersection is called the equilibrium point (Figure 17.14). Figure 17.14 The equilibrium point, potatoes at Mr Marrow's shop (per week). Disequilibriums The term equilibrium is used in this context for a very deliberate reason. The reason for this is that whenever the equilibrium is disturbed, the market price will always tend to return to this point. If the supply and demand curves remain approximately in position over a long period of time, the equilibrium price and quantity are likely to similarly remain in a stable position. A condition called disequilibrium can occur when for one reason or another, a price or quantity situation exists which is away from the intersection point of the two curves...
