AGGREGATE DEMAND

Aggregate demand refers to sum total of demand for all goods and services in the economy during the period of an accounting year. Aggregate demand refers to the total expenditure that the households firms and government of the country are ready to spend for the purchase of goods and services during a given period and at a given level of income.
AD = C + I   (Where, AD= Aggregate Demand, C= Consumption, I= Investment)
          OR
AD= C + G + I +E (X-M)
Where,   C =Household Consumption Expenditure
               G= Government Consumption Expenditure
                 I= Investment
                 E= Net Exports
                 X= Exports
                 M= Imports

Determinants or Components of Aggregate Demand
1)    Household Consumption Expenditure
2)    Government Consumption Expenditure
3)    Investment
4)    Net Exports

Aggregate Demand Schedule and Curve
Aggregate demand schedule refers to aggregate demand corresponding to different levels of income in the economy.

Income (Y)
Aggregate Demand (AD)
0
20
10
25
20
30
30
35
                                    40
40
50
45
60
50
Aggregate Demand Schedule

 From above, we get that
1) If income is 0, then AD is 20. This is minimum level.
2) AD increases with increase in demand.
3) After certain level (40), AD decreases with increase in income.



AGGREGATE SUPPLY

Aggregate supply refers to the flow of goods and services in an economy (or value added or generated) in an accounting year.

AS = C + S
Where, AS= Aggregate Supply
            C = Consumption
            S = Savings

Aggregate Supply Schedule or Aggregate Supply Function
Aggregate supply schedule refers to aggregate supply corresponding to different levels of employment in the economy.
Employment
Aggregate Supply
0
0
10
10
20
20
30
30
40
40
50
50
60
                              60                              
Aggregate Supply Schedule

From above, we get that
1) If employment is 0, then AS is 0. This is minimum level.
2) AS increases with increase in employment.
3) AS will increase until the full employment is not achieved.



EQUILIBRIUM LEVEL OF INCOME, EMPLOYMENT AND OUTPUT

There is no difference in income, employment and output in macroeconomics.
Equilibrium level of income = Equilibrium level of output = Equilibrium level of employment
-          Output refers to value added.
 Value added = income.
So, income = output
-          Output is increased when employment is increased. Output increases in same proportion as that of employment.
Equilibrium level of income or employment or output refers to that level where aggregate supply is equal to aggregate demand or savings are equal to investment
AS (Aggregate Supply) = AD (Aggregate demand)
                       OR
S (Savings) = I (Investments)
AS =Y (Income) = C (Consumption) + S (Savings)
AD = C (Consumption) + I (Investment)

 

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