Aggregate Demand and Aggregate Supply
Aggregate demand
- Aggregate demand (AD) is total spending on a country's output at each price level:
$$AD = C + I + G + (X - M)$$
- C consumption, I investment, G government spending, (X − M) net exports.
- The AD curve slopes down. It shifts when any part changes (a tax cut raises C).
Practice
Which is a component of aggregate demand?
AD = C + I + G + (X − M): consumption, investment, government spending and net exports.
Aggregate supply
- AS is total output firms will make at each price level.
- SRAS slopes up (higher prices → more profit → more output); it shifts when costs change.
- LRAS shows the economy's full capacity; it shifts only when factors change in quantity/quality.
Practice
Long-run aggregate supply (LRAS) shows the economy's:
LRAS represents full capacity; it shifts only when factors change in quantity or quality.
Macroeconomic equilibrium
- Equilibrium is where AD crosses AS — it sets the price level and real output.
Practice
Macroeconomic equilibrium is where AD crosses AS, setting the price level and real output.
The AD–AS intersection determines the economy's price level and real output.
You've got it
Key idea
- $AD = C + I + G + (X - M)$ — slopes down, shifts when a component changes
- SRAS shifts with costs; LRAS = full capacity
- macro equilibrium (AD = AS) sets the price level and real output