Demand: demand curve. Aggregate demand curve. demand curve chart

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The national economy is extremely mobile and is affected by changes in capital, labor resources and scientific and technological progress. But sometimes firms cannot sell the entire volume of output, which leads to a slowdown in production and a decrease in GDP. This can be explained by the economic model of aggregate supply and demand. This model answers the questions why prices fluctuate, what determines actual national production, why its changes are abrupt, etc. To simplify the analysis of processes in the national economy, the concepts of aggregate supply and aggregate demand, as well as the global price level are introduced.

What is demand?

The concept of "aggregate demand" summarizes all the final goods of the national economy, for which there is a demand in the country's markets under certain conditions in a certain time period. In terms of semantic content, this concept is similar to the gross nationalproduct. Its value can be determined using the Fisher formula:

MV=PQ, where:

• M – total money supply;
• V – turnover rate;
• P – average level of commodity prices;
• Q is the total commodity weight in the country's markets.

But at the same time there are differences between these categories:

1. GNP is determined for the year, aggregate demand - for any period of time.
2. GNP includes services along with goods, while demand contains real products.
3. GNP is the result of the activities of companies in a given state. And the subjects of aggregate demand include:

• country population - demand for consumer goods (C);
• companies - investment demand (I);
• government through public procurement system (G);
• net exports - government exports minus imports (Xn).

The formula for calculating aggregate demand (AD) will look like this:

AD=C + I + G + e.

What does the demand curve show?

You can also display aggregate demand using a graph. The demand curve (AD) on the y-axis shows the price level (P), and on the abscissa - the real (in prices of the base period) product.

This chart illustrates fluctuations in spending by governments, companies, individuals and foreign countries, which are caused by changes in the price level. The aggregate demand curve shows a downward trend in the demand for goods as the price rises. And thisthe decrease affects absolutely all spheres of economic life: investment, consumption, exports (net) and government spending.

Price factors influencing demand

Analyzing the graph of the AD curve, one can notice its falling character, which is explained by the following effects:

1. Interest rate. Under constant conditions, the higher its rate, the lower the volume of aggregate demand. A high value of this indicator reduces borrowing and, accordingly, purchases. The change in the demand curve from the low rate is reversed and the economy is stimulated.
2. Import purchases (national currency exchange rate). A decrease in the relative value of the national currency leads to a reduction in the cost of goods produced in the country. Thus, their competitiveness in world markets increases, exports increase, and, consequently, aggregate demand also grows. The demand curve changes slope.
3. Real we alth. Rising prices lead to a decrease in the intrinsic value of money both in paper and accumulated equivalent form. Falling prices, on the contrary, increase purchasing power, and people, in fact, having the same amount, feel richer, and demand grows.

The combination of these incentives leads to the fact that the slope of the demand curve is negative. These factors are price factors, and their influence is considered under the condition of a constant money supply in the national economy.

Non-price influence

The shift in the demand curve has the following form and can be caused by factors that affect the change in household spending,business and government.

Consumption spending

• Consumer welfare. The decrease in the actual value of money and its equivalents stimulates the process of saving. As a result, there is a decrease in the purchasing activity of the population and a shift of the curve to the left (and vice versa).
• Consumer forecasts and expectations. If a consumer expects an increase in income in the future, he will spend more today (and vice versa).
• "Credit history" of consumers. High debt from previous credit purchases forces you to buy less today and save money to pay off your existing loan. The market demand curve will shift to the left again.
• Government taxes. A decrease in the tax rate on income entails an increase in the standard of living of the population and increases its purchasing power at a constant price level.

Investment costs

Interest rate. Provided that all macroeconomic conditions remain unchanged, including the price level, any increase in it will force a reduction in investment spending, and this will necessarily lead to a decrease in demand. The demand curve will again shift to the left

• Expected return on investment. A favorable investment climate and good forecasts for accumulating future profits will certainly increase the demand for cash injections. The schedule will behave accordingly. The demand curve will shift to the right.
• Tax pressure. The larger it is, the lower the profit of subjectseconomic activity, which is a strong incentive to reduce investment spending and demand in general.
• Growth of excess capacity. A firm that is not operating at full capacity will not think about any expansions. If capacities decrease, there will be an incentive to increase territories, open new branches, and so on. Thus, an increase in this indicator reduces the need for an investment product, therefore, aggregate demand will also decrease. The demand curve will shift to the left.

Government spending

Assuming that prices, interest rates and tax payments remain unchanged, an increase in government purchases will lead to an increase in aggregate demand. That is, the ratio between these economic categories is directly proportional.

Export costs

Their growth leads to a shift of the graph to the right, a decrease to the left. It is logical that a decrease in the inflow of imported goods increases domestic demand for domestic products. The aggregate demand curve is also shifting under the influence of the following export-related indicators:

• Income of national economies of other countries. The greater the income of importing countries, the more of our goods they will buy. This will increase our country's net exports and increase aggregate demand.
• Exchange rates. A depreciation of the national exchange rate against the currency of another country leads to a decrease in domestic demand for imports and an increase in exports to this state. Consequently, net exports and aggregate demand will increase. This process will naturally have an impact on the chart. The demand curve will shift to the right.

Mutual integration of national economies is quite large. That is why the change in these macroeconomic indicators is reflected in many interacting systems.

The impact of savings

The demand curve is a graphical representation of the economic trends of the national economy. Another important factor influencing its shift is the marginal propensity to save, an indicator of the distribution of income for consumption and saving.

As a conclusion, it should be added that the demand curve shows, with the help of its shift to the right or left, the nature of the influence of non-price factors on the total value.

What is aggregate supply?

The concept of aggregate supply summarizes all final goods offered on the markets of the country in a certain period of time under unchanged conditions. This indicator can be equal to GNP, since it represents the entire volume of real production.

In macroeconomics, the schedule of aggregate supply depending on the level of employment (underemployment, approaching full-time and full-time) has three sections:

• Keynesian Range (horizontal).
• Intermediate Range (ascending).
• Classical Range (vertical).

Three sentence segments

The Keynesian Range of the supply curve remains horizontal at a certain price level,denoting that firms provide any amount of output at this level.

The classic component of the graphics (Intermediate Range) is always vertical. It denotes the constancy of the volume of output of goods at a certain price range.

The intermediate section (Classical Range) characterizes the gradual involvement of free production factors up to certain limits. Their further involvement will eventually increase costs, and hence prices. The cost of services and goods is gradually rising against the backdrop of slower production growth.

Non-price influence

All non-price factors that have an impact on the level of consumption are divided into:

1. Resource price fluctuations:

• internal - with an increase in the amount of internal resources, the supply curve moves to the right;
• import prices - lowering them will increase aggregate supply (and vice versa).

2. Changes in the rule of law:

• Taxation and subsidies. Increasing tax pressure raises production costs, lowering aggregate supply accordingly. Subsidies, on the contrary, help with financial injections into business and lead to lower costs and increase supply.
• State regulation. Excessive government control raises production costs and shifts the supply curve to the left.

Conclusions

To study short-term macroeconomic fluctuations, an aggregate supply and demand model is used. The main postulate of this theory is that the level of production of consumer goods, as well as prices for them, change in such a way as to balance aggregate supply and demand.

Under such conditions, the demand curve will have a negative slope. This provokes the following processes:

1. Declining prices cause an increase in the real value of household financial assets, which is a factor in stimulating consumption.
2. Low prices reduce the demand for money, increasing investment spending.
3. Decrease in the price level provokes a decrease in interest rates. The consequence of this is the depreciation of the national currency and the stimulation of net exports.

The aggregate supply curve is vertical in the long run. This is because the quantity of services and goods offered depends on the labor, technology, and capital in the economy, and not on the general price level. The short-term curve has a positive slope.

Studying the system "aggregate demand - aggregate consumption" is of great importance for understanding macroeconomic processes. However, many schools have contradictory attitudes towards the same facts, and with a difference in interpretation of the same phenomena, it can be difficult to reach a general conclusion. The type of economic policy and the consequences caused by it directly depend on the goals and motives of people who have a direct impact on the course of economic and social processes.