Demand: a demand curve. The aggregate demand curve. Demand curve graph

The national economy is extremely mobile and feels the impact of changes in capital, labor and scientific and technological progress. But sometimes firms can not realize the entire volume of output, which leads to a slowdown in production and a decline in GDP. The economic model of aggregate supply and demand can explain this. This model answers the questions of why prices fluctuate, what determines the actual national production, why its changes are spasmodic, etc. To simplify the analysis of processes in the national economy, the concepts of aggregate supply and aggregate demand and the global price level are introduced.

What is demand?

The concept of "aggregate demand" summarizes in itself all the end products of the national economy, to which there is demand in the markets of the country under certain conditions in a certain time interval. In terms of semantic content, this concept is similar to the gross national product. Its value can be determined using Fisher's formula:

M * V = P * Q,

Where:

• M - total money supply;
• V - speed of turnover of funds;
• P - average level of commodity prices;
• Q - the total market mass in the markets of the country.

But at the same time, there are differences between these categories:

1. GNP is determined for the year, aggregate demand - for any length of time.
2. GNP includes, along with goods and services, while demand contains real products.
3. GNP is the result of the activities of companies in this state. And the subjects of aggregate demand include:

• Population of the country - demand for consumer goods (C);
• Companies - the demand for investment (I);
• The state through the public procurement system (G);
• Net exports - state exports minus imports (Xn).

The formula for calculating aggregate demand (AD) will look like:

AD = C + I + G + e.

What does the demand curve show?

Also, using the graph, you can display aggregate demand. The demand curve (AD) on the ordinate axis shows the price level (P), and on the abscissa axis - the real (in base period prices) product.

This scheme illustrates the fluctuations in the costs of government, companies, the population and foreign countries, which are caused by a change in the price level. The curve of aggregate demand demonstrates a tendency to reduce the demand for goods as the price increases. And this decrease affects absolutely all spheres of economic life: investments, consumption, exports (net) and state expenditures.

Price Factors of Influencing Demand

Analyzing the graph of the curve AD, you can see its downward character, which is due to the following effects:

1. Interest rate. With unchanged conditions, the higher its rate, the lower the volume of aggregate demand. The large value of this indicator reduces borrowing and, accordingly, purchases. The change in the demand curve from a low rate is the opposite, and the economy is stimulated.
2. Import purchases (exchange rates of national currency). Reducing the relative value of the national currency leads to a reduction in the price of goods produced in the country. Thus, their competitiveness in world markets is increasing, exports are increasing, and, consequently, aggregate demand is also growing. The demand curve changes the slope.
3. Real wealth. The rise in prices leads to a reduction in the intrinsic value of money, both in paper form and in the accumulated equivalent form. The fall in prices, on the contrary, increases the purchasing power, and people, in fact having the same amount, feel richer, and the demand grows.

The combination of these incentives leads to the fact that the slope of the demand curve is negative. These factors are price, and their impact is considered subject to the persistence of the money supply in the national economy.

Non-price influence

The shift in the demand curve has the following form and can be caused by factors that influence the change in spending of the population, business and the state.

Consumption costs

• The level of consumer welfare. Reducing the actual value of money and its equivalents stimulates the savings process. As a result, there is a decrease in consumer activity of the population and a shift of the curve to the left (and vice versa).
• Consumer forecasts and expectations. If the consumer expects an increase in revenues in the future, he will spend more today (and vice versa).
• "Credit history" of consumers. High debts from previous purchases on credit force you to buy less today and save money to repay the existing loan. The curve of market demand will again shift to the left.
• State taxes. The reduction in the tax rate on incomes entails an increase in the standard of living of the population and increases its purchasing power with an unchanged price level.

Investment expenses

• Interest rate. Provided that all macroeconomic conditions, including the price level, remain unchanged, any increase will force to lower investment costs, and this will necessarily lead to a decrease in demand. The demand curve again shifts to the left.

• Expected return on investment. A favorable investment climate and good forecasts for accumulated profits in the future will necessarily increase the demand for infusion of funds. Accordingly, the schedule will behave. The demand curve will shift to the right.
• Tax pressure. The more it is, the less profit the subjects of economic activity, which is a strong incentive to reduce costs for investment activities and demand in general.
• The growth of excess capacity. A company that does not work at full capacity will not think about any extensions. If the capacity will decrease, there will be an incentive to expand the territories, open new branches and so on. Thus, an increase in this indicator reduces the need for an investment product, hence, aggregate demand will also decrease. The demand curve will shift to the left.

Government expenditure

Provided that the prices, interest rate and tax deductions remain unchanged, an increase in public procurement will lead to an increase in aggregate demand. That is, the ratio between these economic categories is directly proportional.

Export costs

Their growth leads to a shift in the graph to the right, a decrease to the left. It is logical that a decrease in the inflow of imported goods raises domestic demand for domestic products. The aggregate demand curve also shifts under the influence of the following indicators related to exports:

• Income of national economies of other countries. The more the income of importing countries of products, the more our products they will buy. This will increase the net exports of our state and increase aggregate demand.
• Exchange rates. The decline in the national currency rate relative to the monetary unit of another country leads to a decrease in domestic demand for imports and an increase in exports to this state. Consequently, net exports and aggregate demand will increase. This process, of course, will have an impact on the schedule. The demand curve will shift to the right.

Mutual integration of national economies is quite large. That is why the change in these macroeconomic indicators is reflected in many interacting systems.

Impact of savings

The demand curve is a graphic representation of the economic trends of the national economy. Another important factor in influencing its shift is the marginal propensity to save, the indicator of the distribution of income for consumption and for saving.

As a conclusion, we should add that the demand curve shows, by its shift to the right or left, the nature of the influence of non-price factors on the aggregate amount.

What is the cumulative offer?

The concept of aggregate supply summarizes all the end products offered in the markets of the country in a certain period of time under unchanged conditions. This indicator can be equal to GNP, since it represents the whole volume of real production.

In macroeconomics, the aggregate supply schedule, depending on the level of employment (incomplete, approaching full and complete), has three sections:

• Keynesian Range (horizontal).
• Intermediate Range (ascending).
• Classical Range (vertical).

Three offer segments

Keynesian range (Keynesian Range) of the supply curve remains horizontal at a certain price level, indicating that firms provide any volume of output at this level.

The classic component of the graph (Intermediate Range) is always vertical. It means the constant volume of output of goods at a certain price range.

The intermediate section (Classical Range) characterizes the gradual involvement of free production factors to certain boundaries. Further their involvement in the end will increase costs, and consequently, prices. Gradually increases the cost of services and goods against a background of not so rapid production growth.

Non-price influence

All non-price factors that have an impact on the level of consumption are divided into:

1. Price fluctuations in resources:

• Internal - with an increase in the number of internal resources, the supply curve moves to the right;
• Import prices - their decrease will increase the aggregate supply (and vice versa).

2. Changes in the rules of law:

• Taxation and subsidies. The increase in tax pressure raises production costs, lowering, accordingly, the aggregate supply. Subsidies, on the contrary, help financial injections into the business and lead to a reduction in costs and an increase in supply.
• State regulation. Excessive goskontrol increases production costs and shifts the supply curve to the left.

conclusions

To study short-term macroeconomic fluctuations, the aggregate demand and supply model is used. The main postulate of this theory is that the level of production of consumption objects, as well as the prices for them, change in such a way as to balance the aggregate supply and demand.

Under such conditions, the demand curve will have a negative slope. This provokes the following processes:

1. The decrease in prices causes an increase in the real value of financial assets of households, which is a factor in stimulating consumption.
2. Low prices reduce the demand for money, increasing investment costs.
3. Lowering the price level provokes lower interest rates. As a result, the state currency depreciates and stimulates net exports.

The aggregate supply curve is vertical in the long run. This is because the number of services and goods offered depends on labor, technology and capital in the economy, and not on the general level of prices. The short-term curve has a positive slope.

The study of the system "aggregate demand - total consumption" is of great importance for understanding macroeconomic processes. However, many schools are contradictory to the same facts, and with the difference in the interpretation of the same phenomena, it is difficult to reach a general conclusion. The type of economic policy and its consequences directly depend on the goals and motives of people who have a direct impact on the course of economic and social processes.