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Eco 13/3 Aggregate Demand and Supply Aggregate Demand and Supply 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 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 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 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 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 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)