AGGREGATE DEMAND CURVE AND AGGREGATE SUPPLY CURVE AND HOW EACH FACTOR - Term Paper Example

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