Aggregate demand and supply

Introduction

Any economy is not going to grow until and unless it has a better production level that fully satisfies its level of demand and level of supply within the society. For any economy, it is essential to recover from any kind of downward trend that could affect its GDP drastically in order to provide better levels of price, more employment opportunities and better rates of interest so that small and medium sized business and employees could have a better option to success in their relative fields. For this purpose, some laws of economics are being discussed in respect of demand and supply and also the effect of these concepts upon the economic condition and the level of output are being evaluated in order to have a much better understanding of the causes and their effects and how they could be stabilized and can be prevented to occur again in future.

Discussion

AS/AD model

AS/AD model refers to the aggregate supply and aggregate demand model. This is an economic related model that refers to the level of price, level of real production that is being used in order to analyse the business cycle, level of gross domestic product, level of unemployment, stabilization of different policies, level of inflation, and phenomena relating to other macro-economic parts are discussed. This model was firstly used and put forward by John Keynes in his work named the General Theory of Employment, Money and Interest. The model of Aggregate supply and aggregate demand is stimulated by the model of standard market that incarcerates the communication between the buyers (aggregate demand) and the sellers (aggregate supply of short-run and long-run).

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Aggregate demand

Aggregate demand within the concepts of macroeconomics is defined as the total demand for final goods and service at a particular time and level of price in an economy (Sexton et al, 2005). This is such an amount of services and goods that are produced or rendered in an economy that will be surely purchased at any given level of price for these services and goods. Aggregate demand is said to be a demand for the gross domestic product (GDP) within a country when the level of inventory are motionless. This concept is also termed as effective demand at some places.

The curve of the aggregate demand is often mentioned as downward sloping due to the lowering in the level of prices that result in increase of the quantity demanded. This concept has been proven to be correct on the level of a single good in microeconomics while in the aggregate level, it's incorrect. The curve of the aggregate demand is in actual sloping downwards mainly because of three effects that are Keynes interest rate effect, Pingou's wealth effect and the exchange rate effect of Mundell Fleming.

Image taken from http://www.harpercollege.edu/mhealy/eco212i/lectures/asad/asad.htm

Aggregate supply

Aggregate supply, in the field of economics, is said to be the total supply of services and goods that a firm plans to sell during a given time period within the national ...