Aggregate Demand

and
Aggregate Supply
Aggregate demand and supply

Aggregate demand
and supply analysis
 Aggregate demand and aggregate supply

AS
Price level

Pe

AD

National output
 Aggregate demand and aggregate supply

AS
Price level

Pe
b a
P2

AD

National output
Aggregate demand and supply

The New Classical

Approach
 New classical version of aggregate supply
AS
Price level

National output
 New classical version of aggregate supply
AS
Price level

P2

P1
AD2

AD1
O Y
National output
Aggregate demand and supply

The Extreme
Keynesian Approach
 Extreme Keynesian version of aggregate supply
AS
Price level

O 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

AD3
AD1 AD2
O Y1 Y2 Y3 Y4 YP
National output
Short-run response of a profit-maximising firm to a rise in demand
£
MC

P1

AR1

Q1 Q
MR1
Short-run response of a profit-maximising firm to a rise in demand
£
MC

P1

AR2
AR1

Q1 MR2 Q
MR1
Short-run response of a profit-maximising firm to a rise in demand
£
MC

P2
P1

AR2
AR1

Q1 Q2 MR2 Q
MR1
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)
c
Price level

P3
P2 b
P1
a

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)
c
Price level

P3
P2 b
P1
a

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)

b AS (long run)
Price level

d
a

AD2
AD1

National output