Concept
Aggregate demand
Overview
In economics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is the demand for the gross domestic product of a country. It specifies the amount of goods and services that will be purchased at all possible price levels. Consumer spending, investment, corporate and government expenditure, and net exports make up the aggregate demand.
The aggregate demand curve is plotted with real output on the horizontal axis and the price level on the vertical axis. While it is theorized to be downward sloping, the Sonnenschein–Mantel–Debreu results show that the slope of the curve cannot be mathematically derived from assumptions about individual rational behavior. Instead, the downward sloping aggregate demand curve is derived with the help of three macroeconomic assumptions about the functioning of markets: Pigou's wealth effect, Keynes' interest rate effect and the Mundell–Fleming exchange-rate effect. The Pigou effect states that a higher price level implies lower real wealth and therefore lower consumption spending, giving a lower quantity of goods demanded in the aggregate. The Keynes effect states that a higher price level implies a lower real money supply and therefore higher interest rates resulting from relevant market equilibrium condition, in turn resulting in lower investment spending on new physical capital and hence a lower quantity of goods being demanded in the aggregate.
The Mundell–Fleming exchange-rate effect is an extension of the IS–LM model. Whereas the traditional IS-LM Model deals with a closed economy, Mundell–Fleming describes a small open economy. The Mundell–Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS–LM model, which focuses only on the relationship between the interest rate and output).
The aggregate demand curve illustrates the relationship between two factors: the quantity of output that is demanded and the aggregate price level. Aggregate demand is expressed contingent upon a fixed level of the nominal money supply. There are many factors that can shift the AD curve. Rightward shifts result from increases in the money supply, in government expenditure, or in autonomous components of investment or consumption spending, or from decreases in taxes.
According to the aggregate demand-aggregate supply model, when aggregate demand increases, there is movement up along the aggregate supply curve, giving a higher level of prices.
Overview adapted from Wikipedia (CC BY-SA 4.0; see the article history for authors).
Possible passages
Found by search and not yet checked by a person; they may only mention the idea in passing.
But in the course of time, the process of the metamorphosis of commodities which produces the different forms of money, transforms also the owners of commodities or changes the character in which they appear before each other in the community. In the process of metamorphosis of the commodity the guardian of the latter changes his skin as often as the commodity changes place or as the money assumes new forms.
Karl Marx, A Contribution to the Critique of Political Economy
States what Aggregate demand is; the author is tied to Aggregate demand in the knowledge graph.
In the stationary state, though capital does not on the whole increase, some persons grow richer and others poorer. Those whose degree of providence is below the usual standard become impoverished, their capital perishes, and makes room for the savings of those whose effective desire of accumulation exceeds the average. These become the natural purchasers of the lands, manufactories, and other instruments of…
John Stuart Mill, Principles of Political Economy
States what Aggregate demand is.
The actual price at which any commodity is commonly sold, is called its market price. It may either be above, or below, or exactly the same with its natural price. The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity,…
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations
States what Aggregate demand is.
Related ideas
- Austrian school of economics
- Friedrich Hayek
- Government
- Karl Marx
- Great Depression
- Theory
- Thomas Robert Malthus
- The General Theory of Employment, Interest and Money
- Utility
- David Ricardo
- Economics
Place in the tradition
Part of Liberalism.