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Equilibrium in the aggregate demand/aggregate supply model

The intersection of the aggregate supply and aggregate demand curves shows the equilibrium level of real GDP and the equilibrium price level in the economy. At a relatively low price level for output, firms have little incentive to produce, although consumers would be willing to purchase a high quantity. As the price level for outputs rises, aggregate supply rises and aggregate demand falls until the equilibrium point is reached.

[link] combines the AS curve from [link] and the AD curve from [link] and places them both on a single diagram. In this example, the equilibrium point occurs at point E, at a price level of 90 and an output level of 8,800.

Aggregate supply and aggregate demand

The graph shows a downward sloping aggregate demand curve that intersects with an upward sloping aggregate supply curve at the point (8,800, 90).
The equilibrium, where aggregate supply (AS) equals aggregate demand (AD), occurs at a price level of 90 and an output level of 8,800.

Confusion sometimes arises between the aggregate supply and aggregate demand model and the microeconomic analysis of demand and supply in particular markets for goods, services, labor, and capital. Read the following Clear It Up feature to gain an understanding of whether AS and AD are macro or micro.

Are as and ad macro or micro?

These aggregate supply and aggregate demand model and the microeconomic analysis of demand and supply in particular markets for goods, services, labor, and capital have a superficial resemblance, but they also have many underlying differences.

For example, the vertical and horizontal axes have distinctly different meanings in macroeconomic and microeconomic diagrams. The vertical axis of a microeconomic demand and supply diagram expresses a price (or wage or rate of return) for an individual good or service. This price is implicitly relative: it is intended to be compared with the prices of other products (for example, the price of pizza relative to the price of fried chicken). In contrast, the vertical axis of an aggregate supply and aggregate demand diagram expresses the level of a price index like the Consumer Price Index or the GDP deflator—combining a wide array of prices from across the economy. The price level is absolute: it is not intended to be compared to any other prices since it is essentially the average price of all products in an economy. The horizontal axis of a microeconomic supply and demand curve measures the quantity of a particular good or service. In contrast, the horizontal axis of the aggregate demand and aggregate supply diagram measures GDP, which is the sum of all the final goods and services produced in the economy, not the quantity in a specific market.

In addition, the economic reasons for the shapes of the curves in the macroeconomic model are different from the reasons behind the shapes of the curves in microeconomic models. Demand curves for individual goods or services slope down primarily because of the existence of substitute goods, not the wealth effects, interest rate, and foreign price effects associated with aggregate demand curves. The slopes of individual supply and demand curves can have a variety of different slopes, depending on the extent to which quantity demanded and quantity supplied react to price in that specific market, but the slopes of the AS and AD curves are much the same in every diagram (although as we shall see in later chapters, short-run and long-run perspectives will emphasize different parts of the AS curve).

In short, just because the AD/AS diagram has two lines that cross, do not assume that it is the same as every other diagram where two lines cross. The intuitions and meanings of the macro and micro diagrams are only distant cousins from different branches of the economics family tree.

Questions & Answers

what is flow variable
Siyanda Reply
a flow is a quantity that can be measured over a specific period of time
is economics a social science or a pure science
Hilda Reply
social science
social science
social Science as a Subject and Pure science as a study
How to compute National income by using the expenditure approach
Bridget Reply
Briefly explain whether the discipline of economics is a social science or pure science( normative or positive)
Okafor Reply
different between absolute advantage and comparative advantage
mathematical economics
masele Reply
show some questions under this topic
why met worth is added with libilitys in the balance sheet
bijoy Reply
what are the implications of inflation targeting?
Alinaitwe Reply
maximize profit
What happens to the goods and money market if the government cuts public spending?
Harman Reply
then the government will be punished by the public
GDP, INFLATION, UNEMPLOYMENT & PRODUCTIVITY and then write a paragraph on the behavior of each variable after analyzing them graphically.
what is international trade
Stella Reply
International trade is the exchange of capital, goods, and services across international borders.
international trade is the exchange of goods and services across boundaries
international trade is the exchange of goods and services of country and abroad
international is the process of exchanges of value interm of goods and services along national frontier
Increase knowdge and skill. it save time and cost. Increase high Efficiency of production .
betta Reply
List kinds of Elastcity of Demand
Is a faster rate of economic growth always a good thing as compared to a slower rate? And why?
what is unemployment
Doctor Reply
it is a situation during which workers remain jobless.
is situation where people are willing to work but job are no available
what is inflation
Sheila Reply
Inflation is a major concern to global economists, and it affects people from all walks of life. It refers to the measure or rate by which the cost of goods and services rises and purchasing power declines. As prices increase, monetary value decreases—prompting consumers to spend less on goods and s
inflation is the persistence rise in price level
Inflation is the situation during which too much money is required to purchase too few goods.
inflation is continuous increase in general price level
it is the process where too much money pursuing fewer goods
what is the law of diminishing marginal utility?.
inusa Reply
The utility drive from last commodity Is a marginal utility
The marginal utility declines as more of a particular good is consumed at a given time
how are you
How do we relate the tale of the two Koreans to GDP?
the utility which is derived from the one commodity by taking continuously can decrease the desire of the particular commodity .that's known as diminishing marginal utility . and we can calculate by using the following formula MU=TUn_TUn-1
The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction or utility that they derive from the product wanes as they consume more and more of that product. For example, an individual might buy a certain type of chocolate for a while.
tell me the introduction of microeconomics
the major in depth concept of macroeconomics
Economic is the wealth
economic have major role to play in your daily life.

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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