Demand and supply have been generalized to explain macroeconomic variables in a market economy. The Aggregate Demand-Aggregate Supply model is the most direct application of supply and demand to macroeconomics. Compared to microeconomic uses of demand and supply, different theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. The AD-AS or Aggregate Demand-Aggregate Supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. It is based on the theory of John Maynard Keynes presented in his work “The General Theory of Employment, Interest, and Money”. It is one of the primary simplified representations in the modern field of macroeconomics and is used by a broad array of economists, from libertarian, monetarist supporters of laissez-faire, such as Milton Friedman to Post-Keynesian supporters of economic interventionism, such as Joan Robinson. Brief history of demand curve and supply curve
According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim economists, such as Ibn Taymiyyah who illustrates- “If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down”. In 1691, John Locke worked on some considerations of the consequences of the lowering of interest and the raising of the value of money. It includes an early and clear description of supply and demand and their relationship. In this description demand is rent: “The price of any commodity rises or falls by the proportion of the number of buyer and sellers” and “that which regulates the price of goods is nothing else but their quantity in proportion to their rent.” The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the “Principles of Political Oeconomy” which was published in 1767. Adam Smith used the phrase in his book “The Wealth of Nations” (1776) and David Ricardo titled one chapter of his work “Principles of Political Economy and Taxation” (1817) On the Influence of Demand and Supply on Price. In The Wealth of Nations, Smith generally assumed that the supply price was fixed but that its value would decrease as its "scarcity" increased, in effect what was later called the law of demand also. Ricardo, in Principles of Political Economy and Taxation, more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. Antoine Augustin Cournot first developed a mathematical model of supply and demand in his 1838 Researches into the Mathematical Principles of Wealth including diagrams. In1870, Fleeming Jenkin in the course of "Introducing the diagrammatic method into the English economic literature" published the first drawing of supply and demand curves including comparative statics from a shift of supply or demand and application to the labor market. The model was further developed and popularized by Alfred Marshall in the textbook “Principles of Economics” (1890). The Standard demand curve and the aggregate demand curve
The standard demand curve represents the quantity of a good that a consumer will buy at a given price, holding all else constant. For example, consumer A might buy zero oranges at $1 each, one orange at 75 cents each, and two at 50 cents each, while consumer B might buy one at $1, two at 75 cents, and three at 50 cents. When charted on a grid with price on the vertical axis and quantity purchased on the horizontal axis, these points form the individual demand curves for consumers A and B. The aggregate demand curve represents the total quantity of all goods (and services) demanded by the economy at different price levels. An example of an aggregate demand curve is given in Figure 1.The vertical axis represents the price level of all...
References: Book | Macroeconomics (6th), N. Gregory Mankiw. |
| Principles of Economics, McGraw-Hill ,New York, 1997b. |
Please join StudyMode to read the full document