Aggregate Demand

Aggregate demand is a crucial concept in AQA A Level Economics, representing the total demand for all finished goods and services within an economy. This page explores the components and shifts in aggregate demand curves.

Definition of Aggregate Demand

Definition: Aggregate demand is the total amount of demand for all finished goods and services produced in an economy.

Shifts in Aggregate Demand Curves

The diagram illustrates how aggregate demand curves can shift:

• A rightward shift (AD1 to AD2) indicates an increase in aggregate demand.
• A leftward shift (AD1 to AD3) represents a decrease in aggregate demand.

Highlight: Shifts in the aggregate demand curve can be caused by various factors such as changes in consumer spending, investment, government expenditure, or net exports.

The Multiplier Effect

The page also introduces the concept of the multiplier effect:

Definition: The multiplier effect shows how an initial injection of spending can lead to a larger overall increase in GDP.

The diagram demonstrates this concept, showing how an initial injection can result in a more significant overall increase in GDP (or related measures like Real National Income, Real National Output, or Real National Expenditure).

Example: If the government increases spending on infrastructure by £1 billion, it could lead to a total increase in GDP of £3 billion due to the multiplier effect.

Aggregate Supply

This page delves into the concept of aggregate supply, another fundamental element in AQA A Level Economics notes. It explores both short-run and long-run aggregate supply, as well as the classical model of aggregate supply.

Definition of Aggregate Supply

Definition: Aggregate supply shows the total productive potential or output of firms in an economy at any price level at a given point in time.

Short-Run Aggregate Supply (SRAS)

The page illustrates the short-run aggregate supply curve and its determinants:

Vocabulary: SRAS refers to the total output firms can produce in the short term, where some factors of production are fixed.

Determinants of SRAS include:

• Raw material prices (influenced by exchange rates)
• Wages (cost of labour)
• Interest rates and taxes (e.g., VAT)
• Productivity (output per worker, per time period)

Long-Run Aggregate Supply (LRAS)

Definition: Long-run aggregate supply represents the economy's productive capacity when all factors of production are fully employed.

The classical model of LRAS is depicted as a vertical line, suggesting that in the long run, output is determined by the quality and quantity of factors of production, not by the price level.

Highlight: The interaction between aggregate demand, short-run aggregate supply, and long-run aggregate supply explains how economies adjust to shocks and return to long-run equilibrium.

Adjustments in the Long Run

The page explains how the economy adjusts in the long run:

• If aggregate demand increases, it initially leads to higher output and prices.
• This increase in the cost of living prompts workers to demand higher wages.
• Higher wages increase production costs, shifting the SRAS curve leftward.
• The economy returns to its long-run equilibrium output (Y*) but at a higher price level.

Example: If there's an increase in government spending, it might temporarily boost output above the long-run level. However, as prices and wages adjust, the economy will eventually return to its long-run output level, but with higher prices.

This process demonstrates the self-correcting nature of the economy in the classical model, emphasizing the importance of understanding both short-run and long-run dynamics in A Level Economics.