Explain the concept of aggregate supply.
OR
Explain any three components of AD.
Explain the concept of aggregate supply.
OR
Explain any three components of AD.
It defines the money value of aggregate goods and services that all the producers are willing to supply in the economy in a given period of time.
AS is also known as national income of the country because the total output of an economy in money terms is equal to the factor income generated in the economy. Aggregate supply is, hence, the national income of the country.
AS = TO = Y
TO = Total Output
Y = National Income
Factor income earned by the households will either be consumed or saved. Hence,
AS = C + S
OR
The main components of AD are:
1. Consumption Demand:
It is the total expenses that all the households in an economy are willing to incur on the purchase of goods and services for their personal consumption in a given time period. The determinant of private consumption demand is the disposable income of the household.
2. Investment Demand:
This refers to the desired demand for capital goods by private investors during a given period of time. Investment means the addition to the capital stock or the expenditure incurred for the creation of new capital asset of the country such as building, plant, and machinery, inventories etc. Investment helps the economy to grow.
3. Government Demand:
It refers to the government's willingness to purchase the goods and services in a given time period. Government purchases are of two kinds:
(a) Consumption spending
(b) Investment spending
The primary determinant of the extent of Government demand for goods and services is the objective of social welfare.
4. Net Export Demand (X-M):
Net Export demand is the demand by the rest of the world for the goods and services of the country in a given period of time. It is the difference between a country's exports and imports. Exports reflect the willingness of the foreigners to purchase a country's goods and services in a given period of time. Imports are the demand of foreign good by a country.
It defines the money value of aggregate goods and services that all the producers are willing to supply in the economy in a given period of time.
AS is also known as national income of the country because the total output of an economy in money terms is equal to the factor income generated in the economy. Aggregate supply is, hence, the national income of the country.
AS = TO = Y
TO = Total Output
Y = National Income
Factor income earned by the households will either be consumed or saved. Hence,
AS = C + S
OR
The main components of AD are:
1. Consumption Demand:
It is the total expenses that all the households in an economy are willing to incur on the purchase of goods and services for their personal consumption in a given time period. The determinant of private consumption demand is the disposable income of the household.
2. Investment Demand:
This refers to the desired demand for capital goods by private investors during a given period of time. Investment means the addition to the capital stock or the expenditure incurred for the creation of new capital asset of the country such as building, plant, and machinery, inventories etc. Investment helps the economy to grow.
3. Government Demand:
It refers to the government's willingness to purchase the goods and services in a given time period. Government purchases are of two kinds:
(a) Consumption spending
(b) Investment spending
The primary determinant of the extent of Government demand for goods and services is the objective of social welfare.
4. Net Export Demand (X-M):
Net Export demand is the demand by the rest of the world for the goods and services of the country in a given period of time. It is the difference between a country's exports and imports. Exports reflect the willingness of the foreigners to purchase a country's goods and services in a given period of time. Imports are the demand of foreign good by a country.
