AGGREGATE DEMAND & RELATED CONCEPTS

AGGREGATE DEMAND & RELATED CONCEPTS

AGGREGATE DEMAND:-

The sum, total of the demand for all the goods and services in an economy during an accounting year is termed as an Aggregate Demand of an economY.

AGGREGATE SUPPLY:-

It is the money value of the final goods and services or national product produced in an economy during one year.

COMPONENTS OF AGGREGATE DEMAND :-

 (a)Intermediate consumption of government sector.

(b) Compensation of employees of government sector.

(c) Imports by government sector.

(d) Net export (X – M)

*NOTE:-

It should be remembered that AD is not zero at zero level of income.
AD = C +1+ G + X- M

COMPONENTS OF AGGREGATE SUPPLY:-

(i) Consumption expenditure (C)              (ii) Saving (S)

*NOTE:-

Thus, Aggregate Supply can also be written as AD = C + S

Propensity to Consume 

It refers to the ratio between consumption (C) and income (Y). It shows level of consumption (C) with respect to a given level of income (Y).

 Average Propensity to Consume 

The ratio between the consumption expenditure and income is called Average Propensity to Consume.

Average Propensity to Consume (APC) = C/Y
Where,       C = Consumption, Y = Income

Marginal Propensity to Consume

 The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.

Consumption Function 

• The functional relationship between the consumption expenditure and the income is known as consumption function.
• C = f(Y)

Where, C = Consumption expenditure
Y = Income

Algebraic Expression of Consumption Function 

The algebraic expression of consumption function is given by

Propensity to Save

 It refers to the ratio between savings (S) and income (Y) with respect to given level of income.

 Average Propensity to Save 

• The ratio between total savings and the total income in an economy at a given level of income is termed as Average propensity to Save.
• Average Propensity to Save (APS) = S/Y

Where,                                      S = Saving
Y= Income

 Marginal Propensity to Save 

The ratio between the change in savings with the change in income is known as Marginal Propensity to Save.

*Saving Function

•  The functional relationship between saving and income is known as saving function.

• S = f(Y)

         Where, S = Saving
          Y = Income or we can also say that saving is a function of income.

• Saving is the excess income which is left with the consumer after paying for all the consumption expenditure.

           S=Y-C

Algebraic Expression of Saving Function 

The algebraic expression of saving function is given by

Relationship between APC and APS

APC + APS =1
or         APC = 1 – APS
and      APS = 1 – APC

 Relationship between MPC and MPS

MPC + MPS = 1
or                                                  MPC = 1 – MPS
and                                                MPS = 1 – MPC

INVESTMENT:-

• There are additions made to the present stock of capital. 
• It leads to an increase in capital assets.

Autonomous Investment

 An investment which is not influenced by expected profitability or level of income is called autonomous investment.

 Induced Investment

•  It is positively related to the level of income in an economy. 
• At higher levels of income, consumption expenditure tends to increase, thereby motivating the producers to increase their investment to be able to meet Higher Demand levels.