Supply and Demand

In the macroeconomic context, supply and demand are forces that control how entire economies behave – specifically through the metrics of aggregate output (GDP) and general price level.

Aggregate Demand

The net quantity of goods and services demanded in an economy at various price levels. (AD = Consumption + Investment + Government Spending + Net Exports)

Aggregate Supply

The net quantity of goods and services producers are willing and able to produce at various price levels.

Graph Characteristics

Axis: price level vs output
Supply sloping up
Demand sloping down
Equilibrium: intersection of supply + demand where economy settles

Purchases are a two-way street – there needs to be someone to buy and someone to sell the product. Therefore, equilibrium of some form is inevitable.

Demand Shifts

1. A positive shift in demand (AD↑) leads to higher output and price level. (GDP↑, PL↑)

2. A negative shift in demand (AD↓) leads to lower output and price level. (GDP↓, PL↓)

Supply Shifts

1. A negative shift in supply (SRAS↓) results in lower output and higher price level. (GDP↓, PL↑)

2. A positive shift in supply (SRAS↑) results in higher output and lower price level. (GDP↑, PL↓)

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Use in Round

Supply and demand are powerful levers that drive impacts such as poverty, instability, etc. Utilize various combinations of raising and lowering supply or demand to lead to impacts – e.g. supply shocks. Understanding this concept is key to utilizing every other economic concept.