0
$\begingroup$

I have been learning about aggregate supply and demand. I have just read this answer which states:

"Aggregate supply is a relationship of price level and output. It is a function, or a curve, or a table. It is not a single value. If we know a particular price level, then we can determine the level of output that would correspond with that. The GDP for 2006 is determined by plugging in the price level of 2006 to the AS curve for 2006, and seeing what output is produced at that price level."

I don't understand, I have learnt the formula AD = C + I + G + (X - M). Wouldn't that give a specific numerical value?

$\endgroup$
1
$\begingroup$

So you learned the formula for aggregate demand and yes if you plug in all the values that the formula needs, it will give you the value of the aggregate demand. Still, you cannot say that AD is a single value, in the sense that if you plug other things in the formula, it gives a different result. What you should say is that AD is a function of C,I,G,(X-M).

What the quote is saying is that the same happens for the aggregate supply, you cannot say, AS is equal to 40, instead what you can say is that AS is a function of the price level. Sometimes you are given an explicit formula, like for AD, and sometimes you are simply given a table or a graph. In all cases, you can see that different price levels can lead to different values of the AS.

$\endgroup$
1
$\begingroup$

This should have been a comment, but I have less that 50 reputation and I am new to this site as are you.

First, I think the point is clear and concise, but you may be misinterpreting it slightly.

Think of demand or supply like a pendulum swing that is being pulled by two forces.

For supply this is prices and output, prices can be pulled by output and output can be pulled by prices.

However, you're right, you can get specific values, you can use the formula.

The formula is particularly useful for averages, the prices and output over time.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.