Difference Between Aggregate Demand and Aggregate Supply

Aggregate Demand vs Aggregate Supply
 

Aggregate demand and aggregate supply are important concepts in the study of economics that are used to determine the macroeconomic health of a country. Changes in unemployment, inflation, national income, government spending, and GDP can influence both aggregate demand and supply. Aggregate demand and aggregate supply are closely related to one another, and the article clearly explains these two concepts and shows they are related to one another in terms of the similarities and differences.

What is Aggregate Demand?

Aggregate demand is the total demand in an economy at different pricing levels. Aggregate demand is also referred to as total spending and is also representative of the country’s total demand for its GDP. The formula for calculating aggregate demand is AG = C + I + G + (X – M), where C is consumer spending, I is the capital investment, and G is government spending, X is exports, and M denotes imports.

The aggregate demand curve can be plotted to find out the quantity demanded at different prices and will appear downwards sloping from left to right. There are a number of reasons why the aggregate demand curves slopes downward in this manner. The first one is the purchasing power effect where lower prices increase the purchasing power of money; the next is the interest rate effect where the lower price levels result in lower interest rates and lastly the international substitution effect where lower prices result in higher demand for locally produced goods and less consumption of foreign/ imported products.

What is Aggregate Supply?

Aggregate supply is the total of the goods and services produced in an economy. Aggregate supply can be shown through an aggregate supply curve that shows the relationships between the amount of goods and services supplied at different price levels. The aggregate supply curve will slope upward, because when the prices increase suppliers will produce more of the product; and this positive relationship between price and quantity supplied will cause the curve to slope upwards in this manner. However, in the long run the supply curve will be a vertical line as at this point the country’s total potential output would have been achieved with full utilization of all resources (including human resources). Since the country’s total production capacity has been achieved, the country cannot produce or supply more, which results in a vertical supply curve. Determination of aggregate supply can help analyze changes in the overall production and supply trends, and can help take corrective economic action if a negative trend continues.

Aggregate Demand vs Aggregate Supply

Aggregate supply and aggregate demand represent the total of supply and demand of all the goods and services in a country. The concepts aggregate demand and supply are closely related to one another and are used to determine the macroeconomic health of a country. The aggregate demand curve represents the total demand in the economy of the GDP, whereas the aggregate supply shows the total production and supply. The other major difference lies in how they are graphed; the aggregate demand curve slopes downward from left to right, whereas the aggregate supply curve will slope upwards in the short run and will become a vertical line in the long run.

Summary:

Difference Between Aggregate Demand and Supply

• Aggregate demand and aggregate supply are important concepts in the study of economics that are used to determine the macroeconomic health of a country.

• Aggregate demand is the total demand in an economy at different pricing levels. Aggregate demand is also referred to as total spending and is also representative of the country’s total demand for its GDP.

• Aggregate supply is the total of the goods and services produced in an economy.