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Aggregate supply and demand are the total supply and demand for goods and services in an economy, affecting prices. Macroeconomics studies these factors and government policies affecting them, represented by curves on a graph, with an equilibrium point. Monetary policy and government regulations impact the economy.
Aggregate supply and aggregate demand is the total supply and total demand for all goods and services in an economy. Most nations have economies made up of individual industries and sectors, each of which adds to the overall economy. Consumer demand for goods and services influences how companies meet that demand with products. This creates a symbiotic relationship that allows companies to determine which product will be more profitable to produce. The study of supply and demand is known as macroeconomics.
Macroeconomics is a top-down look at an economy. Instead of focusing on individual-level economic transactions, it attempts to discover changes or changes in an economy through government policies and natural market forces. Aggregate supply and demand play an important role in macroeconomic study. Changes in unemployment, national income levels, growth rates, inflation, price levels and gross domestic product affect both sides of this economic equation.
These two factors are typically represented by curves on a graph. The supply curve starts in the lower left and slopes up in the upper right of the graph. While not a simple sum of all individual supply curves in the economy, low supply levels will represent a flat supply curve. As more companies increase the output of products, the supply curve becomes more vertical as it slopes upward.
The aggregate demand curve starts in the upper left of the graph and slopes downward towards the lower right of the graph. This curve slopes downward due to consumption and the real wealth effect. An increase in interest rates by the central bank will lead to a reduction in demand as purchasing power decreases. The real wealth effect pushes demand down as the price of goods and services rises, creating lower demand.
Aggregate supply and aggregate demand affect the price of products. Each curve intersects at a certain point on the graph; this represents the equilibrium point for goods and services. At this price point, consumers typically buy the majority of products. Changes occur when monetary policy increases or decreases the money supply. Loose monetary policy tends to increase supply and demand as more money exists for investment and business consumption, while tight money supply has the opposite effect. Additionally, more government regulations or taxes will tend to retard the economy as these factors raise barriers to entry or penalize individuals and businesses for economic activity.
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