Study Notes
Aggregate Demand (AD) and Aggregate Supply (AS) analysis involves understanding how the total demand and supply in an economy interact to determine output, price levels, and employment. AD is the total expenditure on a country's goods and services, while AS is the total output producers are willing to supply at different price levels.
- Aggregate Demand (AD) — total expenditure by households, businesses, government, and foreign entities on a country's goods and services, minus imports.
Example: If consumer confidence increases, AD may rise due to higher spending. - Aggregate Supply (AS) — total planned supply of all producers in the country, differentiated into short-run (SRAS) and long-run (LRAS).
Example: An increase in labor productivity can shift the LRAS curve to the right. - Short-run Aggregate Supply (SRAS) — output supplied when factor prices haven't adjusted to changes in demand and price level.
Example: A rise in raw material costs can decrease SRAS. - Long-run Aggregate Supply (LRAS) — output supplied when factor prices have fully adjusted to changes in demand and price level.
Example: Technological advancements can increase LRAS. - Equilibrium — established where AD intersects with AS, determining the level of real output and price level.
Example: A shift in AD or AS can lead to a new equilibrium point.
Exam Tips
Key Definitions to Remember
- Aggregate Demand (AD)
- Aggregate Supply (AS)
- Short-run Aggregate Supply (SRAS)
- Long-run Aggregate Supply (LRAS)
Common Confusions
- Difference between a movement along and a shift in the AD or AS curve
- Misinterpreting the effects of price level changes on AD and AS
Typical Exam Questions
- What causes a shift in the AD curve? Factors like changes in consumer confidence, investment, government spending, and net exports.
- How does an increase in consumer expenditure affect the AD curve? It shifts the AD curve to the right, indicating higher demand.
- What happens to equilibrium when both AD and AS shift? The new equilibrium depends on the direction and magnitude of the shifts.
What Examiners Usually Test
- Understanding of the components and determinants of AD and AS
- Ability to explain shifts in AD and AS curves
- Analysis of how equilibrium is established and affected by changes in AD and AS