AGGREGATE DEMAND

AND ITS COMPONENTS

Mohd Izhar Ul Islam

MBA-IB
AMU
AGGREGATE DEMAND

 the total demand for final goods & services in

an economy.
 Shows the quantity of goods and services
 That households, firms, the government, and
customers abroad
 Want to buy at each price level

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AD schedule
Income (Y) Consumption (C) Investments (I) AD=C+I
(in Crore) (in Crore) (autonomous) (in Crore)
(in Crore)
0 40 20 60

100 120 20 140

200 200 20 220

300 280 20 300

400 360 20 380

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AD Curve

Aggregate demand curve A curve that shows the relationship

between the price level and the quantity of real GDP demanded
by households, firms, and the government.

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COMPONENTS OF AD
(OPEN ECONOMY)

 CONSUMPTION EXPENDITURE
 INVESTMENT EXPENDITURE
 GOVT. EXPENDITURE
 NET EXPORT = EXPORT – IMPORT

AD = C + I + G + (X-M)

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COMPONENTS OF AD
(CLOSED ECONOMY)

 CONSUMPTION EXPENDITURE
 INVESTMENT EXPENDITURE
 GOVT. EXPENDITURE

AD = C + I + G

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AGGREGATE SUPPLY

 Aggregate Production planned by the

producers during an accounting year.
 AS = Y , Y = INCOME
INCOME (Y) AS
0 0
20 20
40 40
60 60
AS SCHEDULE

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AGGREGATE SUPPLY CURVE

AGGREGATE SUPPLY
140
120
100
80 AGGREGATE SUPPLY
60
40
20
0
0 20 40 60 80 100 120 140

GDP/Y(Income)
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Consumption Function

 The consumption function describes a

relationship between consumption and
disposable income. The concept is believed to
have been introduced into macroeconomics
by John Maynard Keynes in 1936.
_ _
 C = C + bY, here b = MPC & C = autonomous
consumption

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Consumption Function

TABULAR PRESENTATION

Y C

0 20 Dis-Saving

50 60 Dis-saving

100 100 0 saving

150 140 saving

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Average and Marginal Propensity to
save
 Average propensity to save is the ratio of the
amount of consumption to total income.
 APC = C/Y
 C = consumption & Y = Income
 Marginal propensity to save is the ratio of the
amount of saving to total income.
 MPC = ΔC/ΔY
 ΔC for change in consumption & ΔY for
change in income
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Saving function
 Saving is defined as the part of income which is not
consumed because disposable income is either
consumed or saved.
 It’s the functional relationship btw income and saving.
 So, S = Y – C
_
 S = -C + MPS(Y)

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 Saving function
Y C

0 20 Dis-Saving

50 60 Dis-saving

100 100 0 saving

150 140 saving

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Average and Marginal Propensity to
save
 Average propensity to save is the ratio of the
amount of Saving to total income.
 APS = S/Y
 C = Consumption & Y = Income
 Marginal propensity to save is the ratio of the
amount of Saving to total income.
 MPS= ΔS/ΔY
 ΔS for change in Saving & ΔY for change in
income.
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Some observations
 APS + APC =1
C + S =Y
Dividing both sides by disposable income Y
C/Y + S/Y + Y/Y = 1
APC + APS = 1

 MPS + MPC = 1
ΔC + ΔS = ΔY
Dividing both sides by ΔY we have
ΔC/ΔY + ΔS/ΔY = ΔY/ΔY = 1
Therefore, MPC + MPS = 1
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