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Aggregate Demand & Aggregate Supply
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Aggregate Demand & Aggregate SupplyAD definition
Aggregate demand (AD) is the total demand for goods and services produced within the
economy over a period of time.
AD components
• C = Consumer expenditure on goods and services.
• I = Gross capital investment – i.e. investment spending on capital goods e.g. factories
and machines
• G = Government spending e.g. spending on NHS, education. Note transfer payments
in the form of pensions and unemployment benefits are not included because they are
not related to output produced.
• X = Exports of goods and services. Goods leave the country but money from abroad
flows into the economy, therefore this is an increase in AD (an injection into the
circular flow)
• M = Imports of goods and services, although goods enter the country money is
leaving the economy to go to other countries, therefore AD falls.
AD curve
AD slopes downwards because:
• At a lower price level people are able to consume more goods and services because
their real income is higher.
• At a lower price level interest rates usually fall causing increased AD.
• At a lower price level, exports are relatively more competitive than imports.
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