Notes on Aggregate Demand-Aggregate Supply

Here are some basic notes on the Aggregate Demand-Aggregate Supply (AD-AS) model. Once I’m finished my Introductory Macroeconomics courses, I plan on posting some more economics notes.

Thanks to Taras for supplying the notes.

• The AD-AS model tries to predict & explain fluctuations in aggregate economic activity and inflation
  • It works well in situations of full employment and unemployment, allowing it to explain long-term growth trends and corresponding fluctuations.
  • The AD-AS model is an extension of the microeconomic supply-demand model, using total output (GDP) and average price level (P) rather than individual market quantity and price.

Aggregate Demand

α = proportional/related to

• AD is the quantity of domestic GDP people want to purchase given:
  • Price (P α (1/AD))
  • Household Income (H α AD)
  • Government Spending (G α AD)
  • Exports (E α AD)
  • Interest Rate (I α (1/AD))
  • Exchange Rate ($C α (1/AD))
  • The AD curve is a negative relationship between average price level (P) and real GDP (Y)
    • Change in P causes a movement along the AD Curve
    • Change in other factors causes a AD Curve shift

Aggregate Supply

• The AS is the amount of GDP that all firms in the economy are willing to supply.
• It is mostly dependent on factor costs, the biggest of which is cost of labour.
  • In the short-run, factor costs are fixed
  • In the long-run, factor costs aren’t fixed
  • Anything that will change the cost of production will cause a shift in the supply curve.