What is Agregate Demand?
Aggregate demand (AD) is the total demand by domestic and foreign households and firms for an economy's scarce resources, less the demand by domestic households and firms for resources from abroad.
Aggregate demand consists of the amount households plan to spend on goods (C), plus planned spending on capital investment, (I) + government spending, (G) + exports (X) minus imports (M) from abroad. The standard equation is:
AD = C + I + G + (X – M)
The aggregate demand curve:
The AD curve shows the relationship between AD and the price level. It is assumed that the AD curve will slope down from left to right. This is because all the components of AD, except imports, are inversely related to the price level.
What is aggregate supply:
Aggregate supply (AS) is defined as the total amount of goods and services (real output) produced and supplied by an economy’s firms over a period of time. It includes the supply of a number of types of goods and services including private consumer goods, capital goods, public and merit goods and goods for overseas markets.
- Consumer goods
- Capital goods
- Public and merit goods
- Traded goods
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