The aggregate demand curve summarizes the total demand for goods and services in an economy, while supply and demand theory attempts to find the equilibrium price. The consumer price index is used to measure GDP and calculate an average price for necessary expenses. The entire demand curve can shift left or right due to changes in consumer preferences, substitute products, or income, and monetary and fiscal policy can also play a role.
The aggregate demand curve is a macroeconomic concept that summarizes the total demand for all goods or services in an economy. This concept typically focuses on finished products, as consumers mostly buy these items in the cheap market. Aggregate demand can also represent the total of all individual demand curves, which play a fundamental role in the theory of supply and demand.
Supply and demand is a basic economic theory that attempts to find the equilibrium price at which the total supply of goods and services by producers will equal the total demand for goods and services by consumers. This economic concept is displayed on a right-angle graph, with the vertical axis representing product prices and the horizontal axis containing information about the total number of goods or services a business will sell at different price points. The demand curve begins in the upper left corner and slopes downward in the lower right corner of the graph. The supply curve starts at the upper right corner of the graph and slopes downward towards the lower left corner of the graph. The intersection point represents an equilibrium point. This graph represents supply and demand at the microeconomic or single product level.
The aggregate demand curve helps countries measure their gross domestic product (GDP) using a calculation such as the consumer price index (CPI). The consumer price index is an average price of goods or services commonly used by households. Since the aggregate demand curve represents “average” demand for all goods based on GDP, the CPI is an average price representing information on the vertical axis of the aggregate demand and supply graph. In short, the CPI calculates a weighted average price for goods such as food, housing, clothing and similar necessary expenses. Higher average prices for these goods will move the equilibrium point higher on the aggregate demand curve, indicating that fewer goods will be sold in the general economic market.
Instead of the aggregate demand curve moving up and down relative to the average consumer index, the entire demand curve can move left or right on the supply and demand graph. This occurs when customers’ preferences for goods or services change, substitute products or services enter the market that offer better value to consumers, or there are increases in consumers’ overall income. Monetary and fiscal policy can play a significant role in shifting the aggregate demand curve. Higher taxes and inflation can shift the entire curve to the left, decreasing total demand in a lower-income economy. The opposite will occur in light of lower taxes and inflation, which shifts the demand curve to the right.
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