Intro to Aggregate Demand content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics: Characteristics of AD The AD curve

1. Intro to
Aggregate
Demand
Lower 6th Micro
Aggregate Demand

2. Characteristics
of Aggregate
Demand
Intro to Aggregate Demand
Mr O’Grady

3. Characteristics of AD
Definition: The total level of expenditure on all domestic goods and services over a given
period of time
Components of AD: AD consists of the following components:
Consumption (C): Total expenditure by households on goods and services.
Stat: Consumption made up 66% of UK GDP in 2018
Investment (I): Spending, by firms, on capital goods such as equipment and new buildings to produce
more consumer goods in the future
Stat: Investment made up 17% of UK GDP in 2018
Government Expenditure (G): Spending by the government for the benefit of the country’s citizens,
funded by tax revenue and borrowing
Stat: Government expenditure made up 18% of UK GDP in 2018
Net Exports (X-M): The value of the nation's total trade. It is the value of a nation's total exports of
goods and services minus the value of all the goods and services it imports
Stat: Net exports made up -1% of UK GDP in 2018 (+29% for exports -30% for imports)
AD Equation: AD = C + I + G + (X – M)
Analysis: a change in C has the biggest effect on AD compared to the other components
10% increase in C means a 6.6% increase in AD (10% increase in I only means a 1.7% increase in AD)
Therefore the easiest way to increase AD is to increase C
We will look at the best ways to do this in subsequent presentations.

4. The AD curve
Intro to Aggregate Demand
Mr O’Grady

5. AD Curve
AD Curve: The AD curve graphs the relationship between the price level and a
nation’s real expenditure
AD
Real Output
Price
LevelWhy is the AD Curve downward sloping?
Purchasing power falls as the price level rises while
incomes remain constant therefore less demand
Imports become relatively cheaper as the UK price level
rises and are substituted for domestic demand
Movements Along the AD Curve: Correspond to
changes in price level
A fall in the price level leads to an expansion in AD
A rise in the price level leads to a contraction in AD
Shifts of the AD curve: Correspond to shocks that directly or indirectly affect the
magnitude of one or more of the different components of AD
Endogenous shocks: A change in a component of AD
Exogenous shocks: A change in a variable which affects at least one of the AD components,
but which itself is outside the AD model
AD
Real Output
Price
Level
A
B
AD
AD 1
AD 2
Real National
Output
Price
Level

6. Where next?
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