Aggregate Demand
Aggregate Demand
AGGREGATE DEMAND (AD, for short) = C + I + G + (X-M) • The aggregate demand curve is not focused on a single good or service. The AD curve is focused on overall demand for all final goods & services produced across the entire economy.
• Determinants of Aggregate Demand: Although the shape of the AD curve is similar to the shape of a single market demand curve, its shape is based on entirely different principles from what we studied in Chapter 3. To elaborate,
• Single market demand curves are controlled by relative prices, whereas aggregate demand curves respond to general price levels. We are accustomed to downward sloping demand curves. At higher prices, the quantity demanded of a product is going to be less than at lower prices. But remember, the law of demand is based on relative prices. For instance, an increase in the price of coca-cola raises its price relative to its substitute, Pepsi, so consumers will switch their purchases from Coca-cola to cheaper substitutes like Pepsi. Aggregate demand curves, however, reveal how aggregate demand responds to changes in the GENERAL PRICE LEVEL. • Higher prices do not cause aggregate demand to fall. Why? Because when price levels rise, wages also tend to rise along with prices. All boats tend to float, so to speak. Substitutions will be made for those things whose prices are rising more rapidly than others, but in the aggregate, there is no decrease in aggregate demand.
• Definition: The aggregate demand curve shows the quantities of total output (GDP) economic agents in the economy are prepared to buy at different price levels.
Remember that there are four types of spending on final goods and services: personal consumption expenditures (C ), investment expenditures (I), government purchases of goods and services (G), and net exports (X '' M). Aggregate demand therefore equals the real amounts of C + I + G + (X '' M) that economic agents wish
AGGREGATE DEMAND (AD, for short) = C + I + G + (X-M) • The aggregate demand curve is not focused on a single good or service. The AD curve is focused on overall demand for all final goods & services produced across the entire economy.
• Determinants of Aggregate Demand: Although the shape of the AD curve is similar to the shape of a single market demand curve, its shape is based on entirely different principles from what we studied in Chapter 3. To elaborate,
• Single market demand curves are controlled by relative prices, whereas aggregate demand curves respond to general price levels. We are accustomed to downward sloping demand curves. At higher prices, the quantity demanded of a product is going to be less than at lower prices. But remember, the law of demand is based on relative prices. For instance, an increase in the price of coca-cola raises its price relative to its substitute, Pepsi, so consumers will switch their purchases from Coca-cola to cheaper substitutes like Pepsi. Aggregate demand curves, however, reveal how aggregate demand responds to changes in the GENERAL PRICE LEVEL. • Higher prices do not cause aggregate demand to fall. Why? Because when price levels rise, wages also tend to rise along with prices. All boats tend to float, so to speak. Substitutions will be made for those things whose prices are rising more rapidly than others, but in the aggregate, there is no decrease in aggregate demand.
• Definition: The aggregate demand curve shows the quantities of total output (GDP) economic agents in the economy are prepared to buy at different price levels.
Remember that there are four types of spending on final goods and services: personal consumption expenditures (C ), investment expenditures (I), government purchases of goods and services (G), and net exports (X '' M). Aggregate demand therefore equals the real amounts of C + I + G + (X '' M) that economic agents wish