Aggregate demand and Aggregate supply 24 Feb 2022

✓ Aggregate demand is a macro concept. 🅱🆈 🅰🅼🅰🅽 🆁🅰🅹

✓ Aggregate demand = Total expenditure of the economy.
✓ India's Economic system :-
Ans. Mixed economy.

# Mixed economy = Socialism + Capitalism.

_Socialism means government sector.
_Capitalist means private sector of an economy.
# Aggregate demand (AD) = Expenditure by government sector + expenditure by private sector.
Components of Aggregate demand :-
(i) Private Final consumption Expenditure (PFCE) - (consumption by household or
end user consumption).

(ii) Government final consumption Expenditure (GFCE) - ( expenses incurred on

day to day administrative activities or expenses or services offered by the
government to society)

(iii) Investment by Government - Autonomous Investment.

#Induced Investment - Investment directly depends upon profit.

#Autonomous Investment - Investment that doesn't depends upon Profit.

(iv) Net Exports - ( X-M )
AD = 1 + 2 + 3 + 4
C + G + I + ( X-M )

AD = C + I
PFCE
GFCE

Investment
Exports
Imports
AD = Consumption Expenditure + Investment Expenditure
Types of Consumption Expenditure Types of Investments Expenditure
✓ Autonomous Consumption ✓ Autonomous Investment
Expenditure Expenditure
✓ Induced Consumption Expenditure ✓ Induced Investment Expenditure
 26 Feb 2022
AD = C + G + I + ( X - M )
OR, AD = C + I
AD = Autonomous Consumption Expenditure + Induced Consumption Expenditure
+ Autonomous Investment Expenditure
Autonomous consumption -> ( c̅ )
Induced Consumption - β ( YD )
or MPC ( YD )
Autonomous Investment -> I
Δ AD = c̅ + β ( YD ) + I
or, AD = c̅ + MPC ( YD ) + I
# MPC - Marginal propensity to consume -> Change in Consumption Expenditure as a result
of one unit Change in income.
Y -> ₹ 100
Y¹ -> ₹ 101
C -> ₹ 65
C¹ -> ₹ 70

ΔY=1
ΔC=5

YD = Disposable income => Income which is left for use after the payment of taxes.

YD = Y - t , Where 't' stands for taxes.

# Suppose Y is ₹ 1,00,000, t is 10% then YD = ?

YD = Y - t
YD = 1,00,000 - ( 10% Of 1,00,000 )
YD = 90,000

_ Consumption Expenditure depends upon...... ?

Ans. Aggregate income of the Economy.
✓ 'C' is the function of 'income'.
C = f{YD} -> True
Q. What relation is there between Consumption Expenditure and YD ?
Ans. Positive / Direct Functional relation.

YD = > C
YD = > C