Question

Macroeconomics question: Discuss how the aggregate supply/aggregate demand model is different from the basic supply/demand model. be specific in terms of which factors cause each curve (S,D,AD,SRAS) to shift for each model

Answer 1

Supply and demand curve expresses what the consumers demand and what the producers are willing to supply at a given price level.It shows supply and demand for particular markets,for example-market for a particular brand of shampoo or any other product.

Demand depends on price of the commodity,income of the consumers,taste and preferences,availability of substitutes etc.

A change in price causes a movement along the demand curve.

Income-Rise-Rightward shift and vice versa

Taste and preferences-increase in favor of commodity-rightward shift.

Availability of substitutes-If price of substitute rises the demand curve shifts to the right and vice versa.

Supply depends on price,cost of production,substitutes,taxes,technology etc.

A change in price causes movement along the supply curve.

Cost of production-Rises-leftward shift and vice versa.

Substitutes-Price of substitutes rises,supply curve shifts to left.

Taxes-Rise-leftward shift.

Technology-Improvement-rightward shift.

However,AS and AD shows the overall demand and supply of all the markets in a given economy.

AD depends on the general price level,income,wealth,expectations and taxes.

Price level-Higher price level,lesser AD.

Income-rises-rightward shift

Wealth-rises-rightward shift

Expectations of future price-Rightward shift

Taxes-rise-rightward shift

AS depends on technology,price level,wages

Technology-Improvement-rightward shift

Price level-raises AS.

Wages-rise-leftward shift.