“Aggregate Demand and Supply”

&quotAggregateDemand and Supply&quot

&quotAggregateDemand and Supply&quot

Aggregatedemand refers to the total demand for consumer goods and services ata particular price level and given time. Unless there are shortagesin supply, the aggregate demand is equivalent to the gross domesticincome. It is the amount of goods and services that consumers arewilling to but at a particular prices and time. It gives therelationship between the quantity of output in an economy and theaggregate price level. Although factors that affect demand aredifferent from factors that affect aggregate demand, they followsimilar laws. Aggregate demand is affected by factors such asgovernment fiscal policy, changes in household consumption, increaseor decrease in investment and net exports. The most important factorthat affects aggregate demand is the fiscal policy adopted by thegovernment which has a direct impact on government spending andmonetary policies that affects money supply in the economy. Forexample, if fiscal policies results into monetary expansion, theaggregate demand curve will shift to the right. On the other hand,tight fiscal policies that reduce money supply in the economy shiftthe curve to the left (Colander,2008).

Supplyrefers to the amount of goods and services producers are able toprovide in the marketplace at a particular price at a particulartime. There are many factors that affect supply in an economy whichincludes price mechanism, producer expectation and technology amongother factors. The state of production technology in the economy isthe most important factor that affects supply of goods and services.Advancement in technology allows producers to produce more, quicklyand efficiently which enable them to supply more goods at lowerprices in the marketplace. This is because they are able to producein large scale, thus reducing the cost per unit (Colander,2008).


Colander,D. C. (2008). Microeconomics.New York, NY: McGraw-Hill