Revision: Macro Economics >> Determinants of Aggregates Eco HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

Aggregate demand: Aggregate demand implies the total demand of final goods and services by various individuals in all the sectors in an economy. It expresses the total demand in terms of money. In this manner, it can be defined as the actual aggregate expenditure incurred by all the people in an economy on different goods and services.

AD = C + I + G + (X – M)
Where,
Demand by households - Private consumption expenditure (C)
Demand by firms - Private investment expenditure (I)
Demand by government - Government expenditure (G)
Demand by foreign sector- Net exports (X – M)
Where, X is exports and M is imports.

Aggregate supply refers to the aggregate production planned by all the producers during an accounting year. In other words, aggregate supply indicates the total amount of goods and services produced within an economy at a given general (or overall) price level during an accounting period. The aggregate supply function is represented as follows.

`"AS" = f (barN, barL, barK, barT)`

where,

AS = Aggregate supply

N = Natural resources

L = Labour

K = Stock of capital

T = State of technology

The Aggregate Supply Function (ASF) is a schedule that presents the different amounts of income that all entrepreneurs in an economy need to obtain from selling output at different levels of employment.

\[C=\bar{C}+cY\]

• Ratio of total consumption to total income at a given level of income.

\[APC=\frac{C}{Y}\]

• Ratio of total saving to total income at a given level of income.

\[APS=\frac{S}{Y}\]

• Saving is the part of income that is not consumed.

Since,

\[S = Y − C\]

then,

\[s = 1 − c\]

• Change in consumption due to a unit change in income.
• Value always lies between 0 and 1 (inclusive).

\[MPC=c=\frac{\Delta C}{\Delta Y}\]

• Change in saving due to a unit change in income.
• MPC and MPS together always equal 1.

\[MPS=s=\frac{\Delta S}{\Delta Y}\]

• The consumption function \[C=\bar{C}+cY\] shows that consumption consists of autonomous consumption and induced consumption.
• Autonomous consumption \[\overline{C}\] is the minimum consumption even when income is zero.
• Induced consumption (\[cY\]) depends on income.
• MPC measures how much of an additional income is spent; its value always lies between 0 and 1 (inclusive).
• MPS measures how much of an additional income is saved; MPC + MPS = 1.
• \[APC=\frac{C}{Y}\] and APS = \[APS=\frac{S}{Y}\] measure average spending and saving relative to income.
• The 45° line is the reference line where income equals consumption and saving is zero.