Aggregate Demand and Aggregate Supply

Aggregate demand and supply

Aggregate demand and supply analysis

Aggregate demand and aggregate supply

AS

Price level

Pe

AD
O

National output

Aggregate demand and aggregate supply

AS

Price level

Pe
P2

a AD

National output

Aggregate demand and supply

The New Classical Approach

New classical version of aggregate supply

AS

Price level
O

National output

New classical version of aggregate supply

AS

Price level

P2

P1

AD2 AD1

National output

Aggregate demand and supply

The Extreme Keynesian Approach

Extreme Keynesian version of aggregate supply

AS

Price level

YF

National output

Extreme Keynesian version of aggregate supply

AS

Price level

P4

AD4
P

AD3 AD2
AD1
O Y1 Y2 YF

National output

Aggregate demand and supply

A typical short-run AS curve

A typical short-run aggregate supply curve

AS

Price level
O

YP

National output

A typical short-run aggregate supply curve

AS

Price level

AD4

AD1
O

AD2
Y3

AD3
Y4
YP

Y1

Y2

National output

Short-run response of a profit-maximising firm to a rise in demand

MC

P1

AR1
Q1

MR1

Short-run response of a profit-maximising firm to a rise in demand

MC

P1

AR1
Q1

AR2

MR1

MR2

Short-run response of a profit-maximising firm to a rise in demand

MC

P2 P1

AR1
Q1 Q2

AR2

MR1

MR2

Aggregate demand and supply

The New Classical approach

Effect on the long-run AS curve

The long-run aggregate supply curve when firms are interdependent

SRAS1
(expected price level = P1)

Price level

P1
a

AD1 O Q1 National output

The long-run aggregate supply curve when firms are interdependent

SRAS2
(expected price level = P3 )

SRAS1
(expected price level = P1)

Price level

c P3 P2 b a

P1

AD2 AD1 O Q1 Q2 National output

The long-run aggregate supply curve when firms are interdependent

LRAS SRAS2
(expected price level = P3 )

SRAS1
(expected price level = P1)

Price level

c P3 P2 b a

P1

AD2 AD1 O Qn Q2 National output

Aggregate demand and supply

The Keynesian Approach

Effect of investment on the long-run AS curve

Effect of investment on the long-run AS curve

AS1 (short run)

Price level

AD1
National output

Effect of investment on the long-run AS curve

AS1 (short run) AS2 (short run)

Price level b d a

AS (long run)

AD2
AD1
National output