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Concept of Aggregate Demand and Supply

Economics (Year 12) - Aggregate Demand and Supply Model

Christian Bien

What is Difference Between the Regular Demand and Supply and Aggregate Demand & Supply?

You should be familiar with the regular demand and supply model where the price of a good or service is determined by the demand and supply of the product/service. The word aggregate in economic jargon simply means on a macroeconomic scale or in other words the demand for an entire economy's products/services and output of supply from an economy. In year 11, the demand and supply model primarily focused on a microeconomic level focusing on the demand and supply of individuals or certain groups of products/services. E.g determining the price and quantity of bananas from changing demand and supply. Similarly, aggregate demand and supply are not that different. Instead of a singular item, it is the entire economy. Eg determining the price level and output (real GDP) of goods and services in an economy from changing aggregate demand and aggregate supply.

Are the Factors Affecting Microeconomic Demand and Supply the Same as Factors Affecting Aggregate Demand and Supply?

Short answer - no.

Factors affecting microeconomic demand and supply are based off microeconomic factors that are specific and tied to a product/service. For example, a consumer trend could see higher demand for bananas, thus increasing its price and quantity. While this impacts the price of bananas, it is likely to have an insignificant effect on the entirety of the economy. Factors affecting aggregate demand and aggregate supply are based off specific macroeconomic factors that will be discussed in more detail in this section.

Are the Models the Same?

  • The New Classical Model is very similar but with an additional long-run aggregate supply, price level and real GDP line which is discussed in more detail later in this section.

  • The Keynesian Model is very different

What's New?

Price has been replaced with price level (inflation rate)

Quantity has been replaced with real GDP (output)

Classical Model included as a Long Run Aggregate Supply Line - that is the highest level of real GDP (output) that can be achieved with full employment of all an economy's resources The basic principles are still the same though. The shifts in short-run aggregate supply and aggregate demand will still cause changes to price level and real GDP in the same way shifts in supply and demand causes changes to price and quantity.

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