Aggregate Demand & Aggregate Supply
1 Quick Explanation 1–3 min
Aggregate Demand (AD) is total planned expenditure at a given price level; Aggregate Supply (AS) is total planned output.
Equilibrium happens where AD = AS.
2 Detailed Notes
Definition
Definitions
- AD = total planned expenditure on final goods & services in an economy during a period at a given price level. AD = C + I + G + (X − M).
- AS = total planned supply of goods & services = national income (Y). Since income = output, AS = C + S.
- The AD curve is upward sloping (45° line is AS).
Key points
Components of AD
- Consumption (C): depends on income & MPC.
- Investment (I): autonomous in the simple Keynesian model.
- Government expenditure (G) and Net exports (X − M).
- In two-sector model: AD = C + I.
Diagram
Why the 45° line?
AS is drawn as a 45° line from origin where Y (horizontal axis) = C + S (vertical axis). AD = C + I is flatter than AS (because MPC < 1). Equilibrium is where the AD line crosses the 45° line — the only point where planned spending equals planned output.
Important
Components vs determinants
Components: C, I, G, X−M. Determinants of consumption: level of income (mainly) and MPC. Investment is autonomous in the simple model — does not depend on income.
In One Minute
AD = planned total expenditure = C + I + G + (X−M). AS = planned output = Y = C + S. Equilibrium at AD = AS (AD curve meets the 45° line).
Important for Exam
- ⭐ Definition of AD & AS (1–3 marks).
- ⭐ Components of AD with examples.
- ⭐ Diagram: AD = C+I crossing 45° line — draw & label.
- ⭐ Distinguish AD from aggregate demand for a good.
Watch & Learn
Watch on YouTubeAggregate demand and related concepts - Chapter 7 - Class 12 - part 1
by Rajat Arora
Why watch? Concepts + the essential 45° line diagram.
Open on YouTube Watch on YouTubeAggregate demand and related concepts - Chapter 7 - Class 12 - part 1
by Rajat Arora
Why watch? Diagram-drawing focused for boards.
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