Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply

           Aggregate Demand is the quantity of goods and services demanded in an economy at different price level. Aggregate demand curve is a downward sloping curve. Why it is aggregate demand curve is a downward sloping curve? This is due to the real wealth effect, interest rate effect and foreign purchase effect. 

                                                         

Figure 1.0 is an aggregate demand curve. It is use to describe aggregate expenditure outcome of an economy. Horizontal line represents real domestic output while vertical line represent the price level.

      

       Movement along the aggregate demand curve will only happens when there is change in price level. A change in price level will causes the real domestic output to change. Besides price level there are others determinants of aggregate demand curve, including of consumers spending, investment expenditure, government expenditure and net export. Those determinants will cause the shifting of aggregate demand curve. There are a few factors that change the consumer spending and lead to shifting of aggregate demand curve. The factors are consumer wealth, consumer expectation, household borrowing and personal taxes. The increase of consumer spending will causes the aggregate demand curve to shift to the right. Besides consumer spending investment spending also is one of the determinants that lead to shifting of aggregate demand curve. Change in investment is based on real interest rate, expected return, technology, business taxes and degree of capacity. When the investment is high the aggregate demand curve will shift to the right. Furthermore, government purchases will cause the shift of aggregate demand curve. Increase in government expenditure will shift the aggregate demand curve to the right. Net export is due to the change of exchange rate. Depreciation of RM will causes the price to decrease thus making the foreign goods more expensive.

      Aggregate Supply is the quantity of goods and services supply by the produ)ers in an economy at a given price level.

                                                                                                               

                                                                                                                         

       In the short run, aggregate supply curve is downward sloping. All the input prices is fixed while the output prices is variable. In the long run, the aggregate supply is vertical. This shows that there is a full employment and resources are fully used up too.

     The determinant of aggregate supply curve is input prices, change in productivity and change in legal institutional. When the input prices increases, there will be a leftward shifting of aggregate supply curve. Furthermore, decrease in productivity will increase the unit production costs therefore, this will cause the leftward shifting of aggregate supply curve. Then, is the change in legal institutional environment. Factor affecting the change of legal institutional is business taxes, subsidies and government regulation. For example, when business taxes imposed by government regulation per unit of production and this will cause the aggregate supply curve to shift to the left.

    Next, the intersection of aggregate demand and aggregate supply curve show us the , ]economy’s equilibrium and real output. The shifting of aggregate supply and demand curve can lead to economic growth or recession. There are four types of condition. Firstly, increase in aggregate demand curve will causes inflation. The higher the aggregate demand, the higher the price level and this lead to inflation as price of goods and services rises. Next, decrease in aggregate demand will cause recession. When the aggregate demand decrease will lead to unemployment. Then, increase in aggregate supply will lead to fully employment and price stability.

Decrease In Aggregate Demand Causes Inflation in Vietnam

     



Decreases In Aggregate Supply Causes Inflation



        Decrease in aggregate by the producers in economy is not a good sign. In year 2008, Vietnam experience inflation. The inflation rate reaches 27% and it is the highest among the Asian country. Overdose of foreign and low level of technology had cause the price of food and oil rises. Based on the survey, food price had increase up to 74%. On the other hand, price of gasoline raised by 31% and it cost $1.19 per litres. The resulting increase in price level will be inflation. Therefore there will be declining in aggregate supply.Decrease in aggregate supply will causes a  leftward shift of aggregate demand curve from AS1 to AS2. When aggregate supply curve shift to the from AS1 to AS2 the economy moves from a to b. Leftward shifting of aggregate supply curve raise the price level from P1 to P2. As a result, real output decreases from Q1 to Q2. The distance beteween Q1 to Q2 , a negative value is known as recession (GDP) Recession occur when potential GDP is higher than real GDP. When aggregate supply decreases this causes the price level to increase hence there will be reduction of real output. As a result inflation occurs. Vietnam undergo recession in year 2008. The normal inflation rate are 1 to 2% However during year 2008, Vietnam inflation rate is 10 to 20% and it gradually increase to 27%. People in Vietnam is suffering from economic downturn and high level of inflation. Increase in price level of fuel also the transportation cost of raw material increase. When the cost of production increases, the number of production decrease and hence the aggregate supply decrease.