Lecture on Aggregate Supply and Aggregate Demand

Introduction

Study of Aggregate Supply and Aggregate Demand
Focuses on macroeconomics, viewing the economy as a whole
Different from microeconomics which focuses on individual markets (e.g., the market for candy bars)

Example Market: Candy Bars
- Vertical Axis: Price per unit
- Horizontal Axis: Quantity bought or sold
- Demand Curve: Downward sloping
  - High prices = Low quantity demanded
  - Low prices = High quantity demanded
  - Marginal benefit concept: First few units have high benefit; incremental benefit decreases with more units

Aggregate Demand Curve: Downward sloping
Horizontal Axis: Real GDP (total production of the economy)
Vertical Axis: Price level (general level of prices in the economy)
Downward Sloping Curve
- High prices = GDP contracts
- Low prices = GDP expands

Wealth Effect
- Lower prices = People feel wealthier (can buy more with the same money)
- Higher prices = People feel less wealthy (can buy less with the same money)
Interest Rate Effect
- Lower prices = Higher savings = More money available for lending
- Increased savings = Lower interest rates = Stimulates investment
- Higher prices = Lower savings = Higher interest rates = Less investment
Foreign Exchange Effect
- Lower prices = Lower interest rates = Investors convert to other currencies = Domestic currency weakens
- Weakened domestic currency = Domestic goods cheaper for foreign buyers = Increase in net exports

Aggregate demand measures total demand for goods and services in the economy as a function of the price level.
Several factors including the wealth effect, interest rate effect, and foreign exchange effect explain why the aggregate demand curve is downward sloping.
Aggregate demand differs from microeconomic demand because it deals with the entire economy rather than individual markets.