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Aggregate Demand (AD) : Class 12-Macro Economics

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sukh singh
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21 views

Aggregate Demand (AD) : Class 12-Macro Economics

Uploaded by

sukh singh
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Aggregate Demand

(AD)
Class 12- Macro Economics
Aggregate Demand - AD
It refers to the total demand for final goods and services in an economy during an accounting year.

AD is aggregate expenditure on ex-ante (planned) consumption and ex-ante (planned) investment that all
sectors of the economy are willing to incur at each income level.

According to Keynes,
AD refers to the total amount of money, which the buyers are ready to spend on purchase of goods and services,
produced in an economy during a given period.

AD is not measured in terms of physical goods and services but as a part of total income that society is ready to
spend.

AD= C + I + G + (X-M)
Components of AD
The components of aggregate demand are:

(i) Private (or Household) consumption demand

The total expenditure incurred by all the households of the country on their personal consumption is known
as private consumption expenditure.

Consumption demand depends mainly on disposable income and propensity to consume.


(ii) Private investment demand

Private investment demand refers to the demand for capital goods by private investors.

It is addition to the existing stock of real capital assets such as machines, tools, factory – building etc.

Investments demand depends upon MEC (Marginal efficiency of investment) and interest rate
Components of AD
Types of Investment
Components of AD
iii) Government demand for goods and services

Its curve is upward sloping, rises up to Right.

It is income inelastic, i.e., it is not affected by change in income level.


The volume of autonomous investment is the same at all levels of income.
The government demand may be on account of public needs for roads, schools, hospitals, power, irrigation etc, for
the maintenance of law and order and for defence.
iv) Demand for net export (X – M)

Net export represents foreign demand for goods and services produced by an economy.

Exports and imports of a country are influenced by a number of factors such as foreign trade policy, exchange-
rate, prices and quality of goods etc.

Net exports positive when X > M and negative when X < M


AD in two sector model = C + I
Aggregate Supply
It is related with the total supply of goods and services by all the producers in an economy.

Four factor of production like land, labour, capital and enterprise are required for the production of
goods and services. Producers pay rent to land, wages and salaries to labour, interest to capital and
Profits to the entrepreneur for their services in production.

This payment is factor cost from producer’s point of view and factor-income from factor-owner
angle.

AS is the total amount of money value of goods and services that all the producers are willing to
supply in an economy. AS = C + S

Aggregate supply represents the national income of the country.

AS = Y (National Income)
AS Schedule

AS schedule is a table showing the behaviour of AS, corresponding to different levels of Y.

Y AS
0 0
10 10
20 20
30 30
40 40
50 50
CONSUMPTION FUNCTION

Consumption expenditure (C) is directly related to the level of income (Y).

Y  leads to C  and vice versa.


Consumption Function: The functional relationship (algebraic) between C and Y.
It reveals the behaviour of C with respect to the level of Y in the economy.
Observations of the behaviour of C with respect to Y
(i) Autonomous consumption: There is always some minimum level of C, even when Y = 0. This
leads to negative saving (-S).
(ii) C is positively related to Y
(iii) The rate at which C increases mostly lags behind increase in Y because of savings (S)
(iv) The point at which C line intersects Y line is called as “Break-even Point”.
CONSUMPTION FUNCTION
• Tabular Presentation

Table-1
Y C
Table-2
0 20

• 50 60
100 100
150 140
200 180

Prepare diagram in notebook and illustrate your observations


Δ

Slope of C-line (Consumption Function)

Marginal Propensity to Consume


Rate at which C  in response to  in Y i.e. the proportion of
additional Y that goes to C.
MPC is measured as the ratio between change in C to change in Y.

Slope of C-line = ΔC/ΔY

Calculate MPC from table 1 and table 2 with the help of diagram
APC and MPC

Both indicate the ratio between consumption and income.

But, these are different ratios.

APC= C/Y i.e. the ratio between total consumption and total income.
MPC = ΔC/ΔY, i.e. the ratio between change in consumption (additional
consumption) and change in income (additional income).
Slope of Straight Line C-function
Straight line C-function indicates constant slope of C-function which means that
MPC must be constant corresponding to all levels of income. Such a C-function is
called linear consumption function.

It suggests that every time Y , a constant proportion of it is converted into C.


Algebraic Presentation of C-function
C = + bY, here represents autonomous consumption (Minimum level of
consumption) and b- MPC
SAVING FUNCTION

Income is either consumed or saved, so that Y = C + S.


Saving function: The functional relationship between S and Y.
Using the same table 1 and table 2, calculate S and prepare its diagram, also illustrate your observations.
Slope of S-line (Saving Function)
MPS: Rate at which S  in response to  in Y. It indicates the proportion of additional income that goes to
saving. It is measured as ΔS/ΔY.
Slope of a Straight Line S-function is Constant, so that MPS is Constant

It indicates that it has a constant slope means S must be constant corresponding to all levels of income. Such an
S-function is called linear saving function
Algebraic Presentation of S-function
S = - + (1 - b)Y
Relationship b/w Propensity to consume and propensity to
save

APC + APS = 1 (Always)

MPC + MPS = 1 (Always)

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