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.
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
- 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.