Aggregate Demand.

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Presentation transcript:

Aggregate Demand

Learning outcomes To be able to distinguish between demand and aggregate demand To become familiar with the components of aggregate demand To be able to distinguish between inward and outward shifts of the aggregate demand curve

Types of demand Effective demand:- demand supported by the ability of consumers to carry out their demand wishes. Market demand:- total demand in a market for a good, the sum of all individuals’ demand at a given price over a period of time. Aggregate demand:- the total demand for all goods and services in an economy.

Combining the components of AD Imagine a series of individual demand curves for the following:- These are combined to produce the AD curve where AD = C+I+G+(X-M) C I G X shoes Capital equipment Schools Cars Mobile phones machinery Hospitals Whiskey apples premises Roads Cashmere wool fuel Training Grants Financial services Insurance R&D Unemp. benefit Plant and machinery Price level AD Real output

Shifts in the aggregate demand curve (positive/outward) Changes in the components of AD will shift the AD curve Positive changes will shift the AD curve outwards C- An increase in the population or an increase in national income (lower taxes) I - Where firms invest into capital equipment, machinery and premises G – An increase in government spending ( benefits, schools, roads, etc) X – An increase in exports Price level AD2 AD1 Real output

Shifts in the aggregate demand curve (negative/inward) Changes in the components of AD will shift the AD curve Negative changes will shift the AD curve inwards C- I - G – M - Price level AD1 AD2 Real output

The multiplier & accelerator principle Current investment plans based on previous changes to GDP. As GDP rises future plans incorporate this change. Last year GDP rose by 2%, businesses intend on increasing investment by 2.1% expecting the economy to grow in the forthcoming year. Multiplier How a change in injections (I, G, X) can have a disproportionate effect on GDP. That is a £1m injection can increase GDP by more than £1m. This is increase impacts upon future business plans accelerating investment. This injection has a multiplier effect on GDP.