Aggregate demand and
aggregate supply
By : Maheshwari
Aggregate demand:
Aggregate demand refers to the total value of final goods and services which
all the sectors of an economy are planning to buy at a given level of income
during a period of one accounting year.
Aggregate demand is determined by the overall collective spending on
products and services by all economic sectors on the procurement of goods
and services by four components
Aggregate demand consists of all consumer goods, capital goods, exports,
imports, and government spending programs. All variables are considered
equal if they trade at the same market value.
Components of aggregate demand:
Private Net exports
Investment Government
consumption
expenditure (I) expenditure (G) (import & export)
expenditure (C) (X-M)
Aggregate demand = C + I + G + (X-M)
Private consumption expenditure:
It is the total expenditure done by households
on purchase of goods and services during an
accounting year.
Examples of private consumption expenditure
include spending on food, clothing, housing,
transportation, healthcare, education, and
entertainment.
Investment expenditure (I)
• It refers to the total expenditure incurred by all
private firms on capital goods.
• In other words, Investment expenditure refers to the
spending by firms, households, or the government
on new capital goods, such as machinery,
equipment, buildings, and infrastructure, that are
used to produce goods and services in the future.
Government expenditure:
It is the total expenditure done by the government on
consumption and investment.
Government expenditure refers to the amount of money
spent by the government on various goods and services.
It includes all the money spent by the government to
provide public goods and services, such as healthcare,
education, defense, infrastructure, and social welfare
programs.
It includes:
1. consumption expenditure
2. Investment expenditure
Net exports (import & export) (X-M):
• The difference between export and imports is termed
as net exports.
• Exports include demand for goods produced within
the territory of a country by the rest of the world.
• Imports refers to demands of the residents of a
country for the goods that have been produced
abroad.
Aggregate demand = C + I + G + (X-M)
Even through AD has four components, we will assume that AD is a
function of only consumption expenditure and investment expenditure,
i.e., AD = C + I
Disposable income :
It refers to the income from all sources, which is available to
households to for spending on consumption and savings.
Disposable income is the amount of money that households
have available for spending or saving after taxes and other
deductions have been taken out of their income. It is also
sometimes referred to as disposable personal income.
Disposable income can be calculated as follows:
Disposable income = Gross income - Taxes - Social security contributions - Other deductions
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Shifts in aggregative demand :
Changes in consumer confidence
Changes in investment
Changes in government expenditure
Changes in net exports
Changes in monetary policy
Shifts in aggregative demand :
Aggregate supply :
• It known as total output, is the total supply of goods and
services produced within an economy at a given overall price
in a given period.
• In economics, aggregate supply or domestic final supply is
the total supply of goods and services that firms in a
national economy plan on selling during a specific time
period. It is the total amount of goods and services that
firms are willing and able to sell at a given price level in an
economy.
Components of aggregate supply :
Consumption Expenditure (C): Savings(S):
The amount spent by the
consumers on purchasing goods
It constitutes the consumer savings
and services in a particular period
in a given period.
constitutes the consumption
expenditure.
The formula for determining the aggregate supply
is as follows:
AS = C + S
Here, AS is the Aggregate Supply.
•C is the Consumption Expenditure, and
•S refers to Savings.
Shifts in Aggregate Supply
Change in Raw Material Costs
Variation in Labour Costs
Change in Labour Quality and Quantity
Fluctuation in Other Production Costs
Exchange Rate Changes
Taxation and Subsidies
Cheaper Imports
Inflation Rate Fluctuation
Technological Innovation
Shifts in Aggregate Supply
