Aggregate Demand & Aggregate Supply — A-Level Economics Revision
Revise Aggregate Demand & Aggregate Supply for A-Level Economics. Step-by-step explanation, worked examples, common mistakes and exam-style practice aligned to AQA, Edexcel and OCR.
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Go to Economic GrowthWhat is Aggregate Demand & Aggregate Supply?
The AD/AS model is a core framework in macroeconomics used to analyse fluctuations in the whole economy. Aggregate Demand (AD) represents the total spending on domestic goods and services at a given price level, while Aggregate Supply (AS) represents the total output that firms are willing and able to produce. The interaction of AD and AS determines the overall price level, real output (real GDP), and employment in the economy.
Board notes: This model is central to A-Level macroeconomics for AQA, Edexcel, and OCR. All boards require students to use it to analyse the impact of economic shocks and government policies. AQA and Edexcel place a strong emphasis on distinguishing between short-run and long-run effects and the role of sticky wages in the SRAS. OCR often asks students to evaluate the relative importance of AD and AS factors in causing inflation or unemployment.
Step-by-step explanationWorked example
Suppose the UK government increases its spending on infrastructure projects. This is a component of AD (G for government spending), so the AD curve shifts to the right. In the short run, this leads to a higher price level and higher real GDP, causing demand-pull inflation and reducing unemployment. However, if the economy was already at full employment (on the LRAS curve), the only long-run effect would be a higher price level, as the SRAS curve shifts left to a new equilibrium on the LRAS.
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Common mistakes
- 1Confusing the AD/AS model with the microeconomic demand and supply model. The axes are different: the AD/AS model has the general price level on the y-axis and real GDP on the x-axis, whereas the micro model has price and quantity for a single market.
- 2Assuming the short-run aggregate supply (SRAS) curve is always upward sloping for the same reasons as a micro supply curve. The SRAS curve slopes upward because, in the short run, input prices (especially wages) are sticky. As the price level rises, firms' output prices rise, but their costs don't rise as quickly, making it profitable to increase output.
- 3Thinking that a shift in the long-run aggregate supply (LRAS) curve is the same as economic growth. While a rightward shift in the LRAS curve represents an increase in the economy's potential output and is a source of long-term economic growth, short-term growth can occur through an increase in AD without a shift in LRAS.
Aggregate Demand & Aggregate Supply exam questions
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Step-by-step method
Step-by-step explanation
4 steps · Worked method for Aggregate Demand & Aggregate Supply
Core concept
The AD/AS model is a core framework in macroeconomics used to analyse fluctuations in the whole economy. Aggregate Demand (AD) represents the total spending on domestic goods and services at a given p…
Frequently asked questions
What factors can cause the Aggregate Demand curve to shift?
AD is composed of Consumption (C), Investment (I), Government Spending (G), and Net Exports (X-M). Any change in these components will shift the AD curve. For example, a cut in income tax would boost consumption, shifting AD to the right.
What is the difference between the short-run and long-run aggregate supply curves?
The SRAS curve is upward sloping because input prices are sticky in the short run. The LRAS curve is vertical at the full employment level of output, implying that in the long run, output is determined by the economy's factors of production (labour, capital, technology), not the price level.