Aggregate demand and aggregate supply SBC Economics Aggregate demand and aggregate supply Learning outcome W Define aggregate demand and understand its components Explain what causes AD to shift Define aggregate supply Define the different versions of LRAS Explain what causes AS to shift Explain the interaction of AD and AS in the determination of equilibrium output Draw AD/AS curves to illustrate the shifts in the economy Reading: Units 33 & 34

Aggregate demand Aggregate means total, aggregate demand therefore means the total of all of the demand in the economy

Aggregate demand National expenditure is one of the three ways of calculating national income (measured as GDP) National expenditure is made up of: Consumption (spending by consumers of goods and services) Investment (spending by firms on investment goods) Government spending Exports minus imports

National expenditure can be calculated as: Aggregate demand National expenditure can be calculated as: E = C + I + G + X - M

Aggregate demand Aggregate demand can be shown as a curve showing the relationship between the price level and the level of real expenditure in the economy Price level is the average prices in the economy, an increase in the price level is known as inflation Real output is equal to real expenditure and real income (O=E=Y)

The Aggregate Demand curve Price level P2 P1 AD O Y2 Y1 Real output

What causes the AD curve to shift? Consumption (C) An increase in consumer spending will shift the AD curve outward (to the right) Factors that stimulate consumer spending could include: Fall in unemployment Fall in interest rates Boom in the stock market Decrease in savings rates New technology creating new products Decrease in taxation (income tax)

What causes the AD curve to shift? Investment (I) An increase in investment will shift the AD curve outward (to the right) Factors that stimulate investment could include: Increase in business confidence Fall in interest rates Increase in profitability Decrease in taxation (corporation tax)

What causes the AD curve to shift? Government spending (G) An increase in government spending will shift the AD curve outward (to the right) Factors that lead to an increase in government spending could include: Change in government Change in government policy

What causes the AD curve to shift? Exports & Imports (X-M) An increase in the trade balance will shift the AD curve outward (to the right) Factors that lead to an increase in the trade balance could include: Fall in the exchange rate making exports more competitive and imports less competitive An improvement in the quality of domestically made goods