Download Aggregate Demand

Eco 13/3
Aggregate Demand and
Supply
Aggregate Demand and Supply
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Demand and Supply can be applied to
individual decisions and also to the
economy as a whole.
When looking at the economy as a whole,
we’re looking at aggregates- the summing
up of all the individual parts in the
economy.
Aggregate Demand
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Aggregate demand is the total quantity of
all goods and services in the entire
economy demanded by all people.
Basic law of demand applies- the higher the
price, the lower the quantity demanded.
Aggregate Demand
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But in the aggregate, there are millions of
different prices for all products. So aggregate
demand can’t be related to prices.
Instead, it’s related to the price level- the
average of all prices as measured by a price
index.
Aggregate Demand
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If we use the implicit GDP price deflator as
our index, our measure of aggregate demand
will be based on real (adjusted for inflation)
domestic output.
Aggregate Demand
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As the price level in the nation’s economy
goes down, a larger quantity of real
domestic output (production) is demanded
per year.
This change in quantity demanded is shown
as movement along the AD (aggregate
demand) curve.
Aggregate Demand
1. Inflation causes purchasing power to drop.
Deflation causes purchasing power to rise.
2. When price level goes down in the U.S., our
goods become relatively better deals for
foreigners. They demand more as exports.
Aggregate Supply
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If the price level goes up and wages don’t,
overall profits will rise.
Producers will supply more to the
marketplace- they offer more real domestic
output as the price level increases. If the
price level falls, producers will offer less
domestic output.
This is called AGGREGATE SUPPLY.
Aggregate Supply Curve
Putting Aggregate Demand and
Aggregate Supply Together
The equilibrium price level in our example is
determined where the aggregate demand
and supply curves intersect– at the GDP
price deflator.
(see 13.10 on p. 359)
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