Economics Online Tutor
|The Aggregate Demand &
Aggregate Supply Model
The aggregate demand (AD) curve and the aggregate supply (AS) curve are
used in macroeconomics to help explain changes in the overall condition
of an economy. The AD/AS model is a graph that explains the concepts
behind the causes of changes in real GDP and the overall level of prices.
This tool helps explain the business cycle, cyclical unemployment, and
This tool is similar to supply and demand in microeconomics because it
involves a downward sloping aggregate demand curve similar to a
downward sloping demand curve, and an upward sloping aggregate supply
curve similar to an upward sloping supply curve.
The determinants of aggregate demand and aggregate supply are different
from the determinants of demand and supply in microeconomics, but the
two models are related. For example, the sum of all demand curves in an
economy would comprise a large portion of the aggregate demand curve.
Changes relating to demand and supply for individuals, firms and
industries are not considered to be significantly large enough to create
changes in the AD/AS model, unless these changes have implications
throughout the entire economy.
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The aggregate demand & aggregate supply model
is a graph that plots the overall price level on the
vertical axis and real GDP on the horizontal axis.
Changes depicted by this model reflect economic
growth as well as the rate of inflation and the
unemployment rate. Changes in real GDP
represent changes in output, which is economic
growth. The unemployment rate is closely tied to
changes in output: when output increases,
employment tends to increase and unemployment
tends to decrease. A negative correlation exists
between output and the unemployment rate. The
rate of inflation can be considered to be equal to
changes in the price level.
I have divided the discussion of the ad/as model
into three sections: the first section provides a
discussion of the aggregate demand curve and
its components. The second section provides a
discussion of the aggregate supply curve and its
components. The third section involves
combining both curves onto the same graph to
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