money which entrepreneurs expect to get by selling the output produced by the number of labourers employed. Therefore, it is the expected income or revenue from the sale of output at different levels of employment. Aggregate demand has the following four components: . Consumption demand .
Investment demand . Government expenditure and . Net Export ( export – import ) The desired or planned demand (spending) is the amount that households, firms, the governments and the foreign purchasers would like to spend on domestic output. In other words, desired demand in the economy is the sum total of desired private consumption expenditure, desired investment expenditure, desired government spending and desired net exports (difference between exports and imports).
Thus, the desired spending is called aggregate spending (demand), and can be expressed as: - - Theories of Employment and Income AD = C + I + G + (X – M) Figure . . explains that aggregate demand price increases or decreases with an increase or decrease in the volume of employment. Aggregate demand curve increases at an increasing rate in the beginning and then increases at a decreasing rate.
This shows that as income increases owing to increase in employment, expenditure of the economy increases at a decreasing rate. . . Aggregate Supply Function (ASF) Aggregate supply function is an increasing function of the level of employment.
Aggregate supply refers to the value of total output of goods and services produced in an economy in a year. In other words, aggregate supply is equal to the value of national product, i.e., national income. In other words, the aggregate supply refers to the required amount of labourers and materials to produce the necessary output. Employers hire labourers, purchase various inputs and raw materials Employment Figure.
. x y AD Aggregate Demand to produce goods. Thus, production involves cost. If revenue from the sale of output produced exceeds the cost of production at a given level of employment and output, the entrepreneur would be encouraged to employ more labour and other inputs to produce more.
Aggregate supply price is the total amount