Recording-2025-09-23T04:47:38.922Z

Understanding the Aggregate Demand-Aggregate Supply (AD-AS) Model

This unit focuses primarily on the Aggregate Demand-Aggregate Supply (AD-AS) graph, which helps us understand the dynamics of the entire economy. A key question in this unit is: "If this happens, then what?" For example, if aggregate demand increases, what happens to GDP? If short-run aggregate supply decreases, what happens to the price level?

AD-AS vs. Traditional Demand & Supply

Unlike traditional demand and supply graphs that analyze the marketplace for a single product, the AD-AS graph examines the entire economy.

Y-axis: Instead of 'price', we use Price Level (PL), representing the average of all prices in the whole economy.
X-axis: Represents Real National Output or Real GDP (Y).

Short Run vs. Long Run

It's crucial to understand the distinction between the short run and the long run in economics:

Short Run: A period where some factors, such as wages or infrastructure, are fixed due to contracts or the inability to change things immediately.
Long Run: A period where everything can change, meaning all factors of production are variable.

Components of the AD-AS Graph

1. Aggregate Demand (AD)

Downward Sloping: The Aggregate Demand curve slopes downward. This indicates an inverse relationship between the price level and the quantity of real GDP demanded. As the overall price level falls, the quantity of total goods and services demanded in the economy increases.

2. Short-Run Aggregate Supply (SRAS)

Upward Sloping: The Short-Run Aggregate Supply curve slopes upward. This indicates a positive relationship between the price level and the quantity of real GDP supplied. As the price level rises, firms are generally willing and able to produce more goods and services in the short run.

3. Long-Run Aggregate Supply (LRAS)

For current discussions on equilibrium, we can temporarily ignore the Long