Economics
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.
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eBook - ePubEconomics
The Definitive Encyclopedia from Theory to Practice [4 volumes]
- David A. Dieterle(Author)
- 2017(Publication Date)
- Greenwood(Publisher)
A AGGREGATE DEMAND AND AGGREGATE SUPPLYAggregate demand and aggregate supply are two of the primary concepts in macroeconomics. Aggregate means total, and demand is the desire and ability to purchase goods and services. Supply refers to the desire and ability of producers to provide goods and services. Aggregate demand is the total amount of goods and services demanded in an economy during a given time period, while aggregate supply is the total amount of goods and services provided. Aggregate demand is composed of all consumer spending, investment spending, government spending, and net exports (exports–imports)—the components of gross domestic product (GDP). Aggregate supply is composed of all income, in the forms of wages, rents, profits, and interest earned.The British economist John Maynard Keynes (1883–1946) is credited with creating the concepts of aggregate demand and aggregate supply. He used these concepts in the 1930s to explain how governments can recover from recessions by increasing government spending to impact aggregate demand, which in turn would increase aggregate supply. Keynes did the lion’s share of his writing and economic thought from 1920 to 1940. Prior to Keynes, market explanations centered on classical economics, popularized by the writings of Adam Smith (1723–1790). Smith emphasized the market concept of laissez faire, which is the minimal use of government actions to control economic activity.Aggregate demand and aggregate supply are graphed on the aggregate demand and aggregate supply graph with the y-axis being the general price level, or CPI, and the x-axis being real GDP. The aggregate demand curve is downward-sloping to the right while the aggregate supply curve is upward-sloping.Aggregate DemandMost economists support the downward-sloping aggregate demand (AD) curve for three primary reasons: the wealth effect, the interest rate effect, and the exchange rate effect. All three of the explanations for the downward-sloping AD curve center around lower prices, which induce greater quantity demanded and the downward slope of the AD curve. When the price level falls, wages do not change immediately, which makes consumers feel wealthier so they purchase more goods and services than before. When interest rates fall, consumer spending on durable goods such as homes and cars and business investments on capital goods will increase. When the domestic exchange rate falls, domestic exports become relatively cheaper to foreign consumers and foreign sales will increase.
- Lou Jiwei, China Development Research Foundation(Authors)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
Equilibrium in Aggregate Supply and Demand, and equilibrium in ‘the use of national income’ and the ‘production of national income,’ are two pairs of economic concepts that are used to analyze short-term economic phenomena. Using them as analytical tools can help us touch upon certain structural issues in our national economy and its prospects for long-term steady growth. They cannot be used to explain these issues in a fully comprehensive way. Nonetheless, equilibrium in our aggregate economy is the basis for any structural evolution and long-term steady growth. One could even say that correcting short-term imbalances in the overall economy is a prerequisite for steady economic growth. Therefore, it is absolutely necessary to have a deep understanding of the full meaning of these two pairs of concepts, as well as how they differ in terms of the policy considerations each one implies.Articles on economic topics in our country often equate the ‘aggregate demand and aggregate supply equilibrium’ with ‘equilibrium in use of our national income and the production of our national income.’ They refer to an ‘excess of aggregate demand over aggregate supply’ as though it were the same as the ‘excess distribution of the national income.’ In fact, these two pairs of concepts are linked but also have certain distinctions. The implications of their corresponding parts are not equivalent. Let’s look at a comparative analysis.1. The aggregate supply and the amount of ‘national income production’
Simply put, ‘aggregate supply’ refers to those products and services that have an ‘actual practical-use value’ that can be produced by existing production capacities within one year. It can be roughly expressed in terms of the expected gross national product (GNP) as measured in constant prices, or by the expected national income. The thing that aggregate supply focuses on is the production capacity of such productive factors as assets, labor, land, imported materials, and foreign capital inflows. Within any given year, these are limited. Each is constrained by the quantity and quality of all other factors. For example, a quantitative maximum is imposed on imported materials and the amount of our foreign debt by the smallest extent of foreign exchange reserves and the highest amount of debt-servicing. ‘Aggregate supply’ refers to the maximum amount of ‘well-being’ that can be produced by the full capacity of production factors, after they are combined in optimal fashion. It is also referred to as the ‘production-possibility frontier’ or the ‘potential production level.’ We should say that referring to the maximum well-being of people is more accurate, since it excludes from the figures production of overstocked things that people don’t need, either for immediate or long-term consumption (as investment).
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
The first conclusion, which is not exactly a hot news flash, is that an economic approach focused only on the supply side or only on the demand side can be only a partial success. We need to take into account both supply and demand. The second conclusion is that since Keynes’ law applies more accurately in the short run and Say’s law applies more accurately in the long run, the tradeoffs and connections between the three goals of macroeconomics may be different in the short run and the long run. 11.2 Building a Model of Aggregate Demand and Aggregate Supply LEARNING OBJECTIVES By the end of this section, you will be able to: • Explain the aggregate supply curve and how it relates to real GDP and potential GDP • Explain the aggregate demand curve and how it is influenced by price levels • Interpret the aggregate demand/aggregate supply model • Identify the point of equilibrium in the aggregate demand/aggregate supply model • Define short run aggregate supply and long run aggregate supply To build a useful macroeconomic model, we need a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level. We call this the aggregate demand/aggregate supply model. This module will explain aggregate supply, aggregate demand, and the equilibrium between them. The following modules will discuss the causes of shifts in aggregate supply and aggregate demand. 274 11 • The Aggregate Demand/Aggregate Supply Model Access for free at openstax.org The Aggregate Supply Curve and Potential GDP Firms make decisions about what quantity to supply based on the profits they expect to earn. They determine profits, in turn, by the price of the outputs they sell and by the prices of the inputs, like labor or raw materials, that they need to buy. Aggregate supply (AS) refers to the total quantity of output (i.e. real GDP) firms will produce and sell.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
The first conclusion, which is not exactly a hot news flash, is that an economic approach focused only on the supply side or only on the demand side can be only a partial success. We need to take into account both supply and demand. The second conclusion is that since Keynes’ law applies more accurately in the short run and Say’s law applies more accurately in the long run, the tradeoffs and connections between the three goals of macroeconomics may be different in the short run and the long run. 24.2 Building a Model of Aggregate Demand and Aggregate Supply LEARNING OBJECTIVES By the end of this section, you will be able to: • Explain the aggregate supply curve and how it relates to real GDP and potential GDP • Explain the aggregate demand curve and how it is influenced by price levels • Interpret the aggregate demand/aggregate supply model • Identify the point of equilibrium in the aggregate demand/aggregate supply model • Define short run aggregate supply and long run aggregate supply To build a useful macroeconomic model, we need a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level. We call this the aggregate demand/aggregate supply model. This module will explain aggregate supply, aggregate demand, and the equilibrium between them. The following modules will discuss the causes of shifts in aggregate supply and aggregate demand. 584 24 • The Aggregate Demand/Aggregate Supply Model Access for free at openstax.org The Aggregate Supply Curve and Potential GDP Firms make decisions about what quantity to supply based on the profits they expect to earn. They determine profits, in turn, by the price of the outputs they sell and by the prices of the inputs, like labor or raw materials, that they need to buy. Aggregate supply (AS) refers to the total quantity of output (i.e. real GDP) firms will produce and sell.
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, CFALEARNING 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
eBook - ePubA Primer on Macroeconomics
Policies and Perspectives
- Thomas M. Beveridge(Author)
- 2018(Publication Date)
- Business Expert Press(Publisher)
In Volume I, we identified the major elements and models that economists use to study our world of choices—the chief being, of course, demand and supply analysis. In this volume, we will dig deeper into these principles and use them to discover how policies and perspectives influence our economic well-being.In this chapter you may gain some insights into yourself and your own beliefs. Do you favor dealing with short-run problems as they arise because “in the long run we’re all dead,” or do you subscribe to the view that we should “stay the course,” not be distracted by short-term troubles, and let long-term objectives dominate our actions? Each is a valid preference—there is no one-size-fits-all answer.The great majority of car drivers believe that they are better drivers than the great majority of car drivers! Each of us believes that we are above average because each of us tends to overvalue those skills in which we are most proficient and to discount those skills in which we are least proficient. Fast drivers believe that the ability to drive fast reveals mastery, whereas slow drivers believe that prudence and consideration for other road users are the true mark of the “good” driver. We each have biases that influence our perception of the world. So, too, with economics.Chapter Preview: In Chapter 1 (Volume I) we discovered the benefits of exchange and, later in Volume I, in Chapter 2, we elaborated that analysis by developing the demand and supply model. Further, Chapters 3 and 4 have given us some of the measures used to monitor economic performance. In this chapter we turn our attention to our main tool of macroeconomic analysis—aggregate demand and aggregate supply, or the ADAS model.Aggregate DemandIn this section we define aggregate demand, outline the appearance of the aggregate demand (AD) curve and the reasons for that appearance, and consider the factors that can shift the position of the curve.Aggregate demand is the total amount of intended spending on a nation’s final goods and services by its households, firms, the government sector, and foreigners. The aggregate demand curve depicts the negative relationship between the quantity of aggregate output (real GDP) demanded and the aggregate price level (P) as shown in Figure 5.1
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
Q would be as follows:These figures show a “straight-line” relationship between real income and demand of the kind illustrated in Figure 6.1 . Now suppose that supply prices ($ per unit of Q) at the various levels of Q are as follows:Fig. 10.2 Aggregate Supply and Demand curves. The demand curve indicates the total desired expenditure at each level of real output if goods are offered at the appropriate “supply price.”When both Q and D are multiplied by these prices, the resulting pQ’s are the values of aggregate supply for the different values of Q, and the pD’s are aggregate demand in money terms:When these figures are plotted in a graph, they are consistent with curves similar to those shown in Figure 10.2 .Over most of its length, d(Q, p) has a curvature similar to that of the aggregate supply curve. To the right of the intersection of the two curves at E, expected revenue is greater than desired expenditure, while to the left of the intersection the reverse is true, indicating that E is a point of stable equilibrium with respect to both real output and the price level. It corresponds to the point E in Figure 6.1 , where income and aggregate demand are equal; just as aggregate demand in real terms exceeds output to the left of E and falls short of it to the right, so in Figure 10.2
eBook - ePubThe American Economy: A Student Study Guide
A Student Study Guide
- Wade L. Thomas, Robert B. Carson(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
The cyclical behavior of the economy has long attracted economists’ attention and a variety of explanations have been put forward to explain the expansion and contraction of the economy. Indeed, the business cycle remains at the center of macroeconomic theory and policy-making objectives. 4. The principal tool of the modern-day macroeconomist in efforts to study and explain aggregate economic behavior is aggregate demand and aggregate supply analysis. By viewing aggregate output of the economy in terms of spending for goods and services (aggregate demand) and the output values of actual production (aggregate supply), the relationships that exist between price levels and levels of real output can be discerned. Shifts in aggregate demand and aggregate supply necessarily affect price level-output combinations
eBook - PDFMacroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 174 Part 2 The Macroeconomy: Aggregate Supply and Demand l ine? Recall f rom the a pp endix to Cha p ter 1 that a 45 l ine mar k s a ll points on a g rap h at which the value o f the variable measured on the horizontal axis ( in this case, GDP ) e q uals the value o f the variable measured on the vertical axis (in this case, total ex p endi -ture ) . 2 Thus, the 45 line in Figure 3 shows all the points at which output and spending are e q ua l —t h at is, w h ere Y C I G C G X I M I I . The 45 l ine t h ere f ore d is pl a y s a ll t h e p oints at w h ic h t h e econom y can p ossi bly b e in d eman d -si d e e q ui l i b rium , f o r firm s will b e co nt e nt with current output levels onl y if total spendin g equals production . Now we must compare these potential equi l i b rium points wit h t h e ac t ual co m b inati o n s o f spendin g and output that are consistent with the behavior o f consumers and investors. That behavior is described b y the C I G I X IM X line in Fi g ure 3, which shows how total expenditure varies as income chan g es. T h e econom y wi ll a l wa y s b e on t h e ex p en -d it u r e l in e because only points on the C I G I X I M X lin e ar e co n s i s t e nt with th e s pendin g plans of consumers and investors. Similarl y , if the economy is in equilibrium, it m ust be o n t he 45 l ine. As Fi g ure 3 s h ows, t h ese two requirements imp ly t h at t h e on ly via bl e equi l i b rium comes at point E , w he r e t he C I G I X IM X l in e int e r sec t s t he 45 l ine. On ly t h is point is consistent wit h b ot h equi l i b rium an d peop l e’s d esires to con -s um e and inv es t .
eBook - PDFMacroeconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
174 Part 2 The Macroeconomy: Aggregate Supply and Demand measured on the horizontal axis (in this case, GDP) equals the value of the variable mea- sured on the vertical axis (in this case, total expenditure). 2 Thus, the 458 line in Figure 3 shows all the points at which output and spending are equal—that is, where 5 1 1 1 2 Y C I G X IM ( ). The 458 line, therefore, displays all the points at which the economy can possibly be in demand-side equilibrium, for firms will be content with current output levels only if total spending equals production. Now we must compare these potential equilibrium points with the actual combinations of spending and output that are consistent with the behavior of consumers and investors. That behavior is described by the 1 1 1 2 C I G X IM ( ) line in Figure 3, which shows how total expenditure varies as income changes. The economy will always be on the expenditure line because only points on the 1 1 1 2 C I G X IM ( ) line are consistent with the spending behav- iors of consumers and investors. Similarly, if the economy is in equilibrium, it must be on the 458 line. As Figure 3 shows, these two requirements imply that the only viable equilibrium comes at point E, where the 1 1 1 2 C I G X IM ( ) line intersects the 45 ° line. Only this point is consistent with both equilibrium and people’s consumption and investment decisions. Notice that to the left of the equilibrium point, E, the expenditure line lies above the 458 line. This means that total spending exceeds total output, as we have already noted. Hence, inventories will be falling, and firms will conclude that they should increase produc- tion—driving production toward the equilibrium point, E. The opposite is true to the right of point E. Here spending falls short of output, inventories rise, and firms will cut back on production—thereby moving closer to E. In other words, whenever production is above the equilibrium level, market forces will drive output down.
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