Things to Know About Aggregate Demand and Supply in Macroeconomics

It is one of the most important topics of macroeconomics. Any economy produces a number of goods and services. This produced quantity is output. We can determine the total output of any economy with the help of aggregate demand and supply. If a country has a higher output level, it will be rich. It is not the money that makes a country rich. From an economist perspective, it is critical to understand the fluctuations of output. If he understands this thing, he will be able to analyze the economic growth in the long term. Any increase in growth and factors of production will influence the level of output. There are some other factors too that will help to fluctuate the level of output. Those factors can be land, labour and capital. Apart from this, economic efficiency also can fluctuate the level of output. This article by professional dissertation writers aims to provide a brief overview of aggregate demand and supply.

Demand, Supply and Equilibrium:

The will to buy goods and services is often termed as demand. At the same time, supply is the opposite of demand. It means the number of goods and services a producer is willing to sell at a set price. It is important to remember that other things will be constant. Equilibrium is the point where demand and supply forces intersect each other. There will be no external forces that will influence the equilibrium value. Those forces can be price and quantity. Before we go into details, it was important to discuss this area of economics. This important aspect will help us understand the given topic.

Aggregate Supply and Aggregate Demand:

It is the sum of all the goods and services that a firm sells at a given time in a national economy. Firms will sell these goods and services at a set value in an economy. At the same time, aggregate demand is the overall need for goods and services across the economy. Consumers are inclined to this economic consumption at a set value in a given time. It is the gross domestic product of a country.

Aggregate Supply-Aggregate Demand Model:

Equilibrium is the level at which the quantity demanded meets the quantity supplied. We can represent this on AS-AD Model. It is the model where both demand and supply forces intersect each other. In the long run, any rise in AD will lead to an upsurge in the price. When there will an increase in demand, it will shift towards right. In the longer run, capital, labour, and technology affect the aggregate supply. For example, an increase in population will affect the aggregate supply.

It is aggregate supply that determines the aggregate demand. So, there is a direct relationship between demand and the prices of goods and services. If both aggregate demand and supply shift, the equilibrium point will also shift. If the aggregate demand curve shifts, the equilibrium point will move horizontally. Along with the equilibrium point, the aggregate supply curve will also shift. It will keep shifting until there is a new aggregate demand point.

Reasons for Shift in Aggregate Demand and its Consequences:

The aggregate demand curve changes the equilibrium price and level of output. This curve will shift because of consumer spending. If consumer spending declines, it will shift to the left. If consumer spending increases, it will shift to the right. Consumers can decide to spend less because of the increasing cost of living. Government taxes are another reason in this regard. So, a consumer can decide to spend less and save more.

It will help him to meet unexpected expenses such as future increases in prices. One of the major consequences of the right-ward shift of this curve is a price increase. It will increase the level of production that will result in increasing the price level. There is another consequence when the economy is close to the optimal level. It will increase the price more than the output when aggregate demand rises.

Shifts in the Aggregate Supply-Aggregate Demand Model:

The AS-AD model is based upon the theory of demand and supply. This model helps demand and supply forces to meet macroeconomic equilibrium. The shape of AS curve will help to determine the shape of the AD curve. If there is an increase in AS curve, it will increase the AD curve. An upsurge in the AD curve will increase the output or prices. If there is an increase in aggregate demand, it will shift the curve right-ward. When it shifts to the right, it will increase the level of production. Apart from this, there will be a price increase too. When an economy is dominating by the price increase, it is near to reaching its optimal level.

Reasons for Shift in Aggregate Supply and its Consequences:

The AS (aggregate supply) curve will move because of the cost of production. If there is an increase in taxes, labour wages, and material prices, it will shift the AS curve. Any change in quality and quantity of labour will also shift this curve. It will affect the AS curve both in the short-run and long run. If labour or any other input becomes cheaper, it will cause a supply shock. As a result that, the aggregate supply curve will shift outward. It will result in a drop in equilibrium price. When equilibrium price decreases, it will increase the equilibrium quantity.

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Conclusion:

AD-AS model is one of the most important aspects of macroeconomics. This model helps to determine the level of out any economy is producing at any given time. It is important to understand the scenarios that will cause a shift in AS and AD curves. For example, the AD curve shifts rightward because of increasing consumer spending. As a result of this shift, the price level will increase. The AS curve will shift because of labour and material prices. If the price decreases, there will be a supply shock. It will shift the supply outward and result in the disequilibrium of price.