The combination of these individual demand and supply in the economy, results in aggregate demand and supply of the whole economy. The aggregate demand curve is downward sloping representing an inverse relationship between demand for goods and services and the price level in an economy. Aggregate demand consists of components such as; government spending, households and businesses consumption, total investments and net exports (Geoff). These components are also referred as real gross domestic product (GDP). Unlike in demand curve, in aggregate demand curve, price is assumed to be constant and aggregate demand is determined by changes in components of real GDP thereby prompting shifts in aggregate demand curve rather than movements along the curve.
The aggregate supply curve is upward sloping showing a positive relationship between the price level and quantity of output supplied. It is assumed that the factors of production remain constant in the short-run due to time lag but in the long-run the price of inputs increases to offset rise in prices up to a level equal to supply of goods and services referred as normal or natural level of output or real GDP. The factors of production include labour, capital, technological advancements, wages and rent among others. These inputs combined with economic growth causes the aggregate supply curve to shift. However in the long-run, the quantity of goods and services supplied remains constant despite changes in price level hence the curve is vertical. On the other hand, factors such as labour may change due to unexpected events thereby shifting the long-run aggregate supply curve (Mankiw & Taylor, 693). This paper is a critique of aggregate demand curve and aggregate supply curve and equilibrium of the two.
It is a downward sloping curve showing inverse relationship between price level and quantity of goods and ...
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There are various types of business organizations. This includes public limited companies, private limited companies, voluntary organizations and co-operatives. The country as a whole owns the public limited companies. The local authority and the government control these companies.
Increased aggregate demand for goods in turn enables governments and business firms to earn profits and may expand. This business expansion programs will demand for more labour. In addition, trade restrictions limit transfer of capital and entrepreneurship into/from different countries thus less creativity and innovation.
Economists are in agreement that prices and quantities are descriptively the most observable attributes of individual interests that interact within a market structure to facilitate a mutually beneficial exchange as envisaged by Adam Smith (Friedman 145).
There are four primary laws of supply and demand. First, if demand rises and supply remains unaffected, there will be a shortage causing a higher equilibrium cost. Second, if demand lessens and supply remains unaffected, there will be a surplus causing a lower equilibrium cost.
On the other had human beings have unlimited wants. In a free market economy, the forces of demand and supply determine the market equilibrium and the prices are determined by the price system. When a country or a company has a comparative advantage compared to the other countries, producing a same good, the country which has the advantage can supply the good at a cheaper rate compared to the other countries.
Elasticity of demand has also been explained in the paper.
In economics, supply and demand are two important concepts that define the operations of a business. Demand for a commodity refers to the availability of ready market or
These are prices, speculation, government policies, tastes and preferences, and changes in income.
Supply and demand in economics are two concepts, which carry a lot of significance as they determine the