1. 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

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

3. 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

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

5. 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)

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

7. 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)

8. 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)

9. 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

10. 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