StellarAD/AS Model
The Aggregate Demand-Aggregate Supply (AD-AS) model is a fundamental framework in macroeconomics used to analyze fluctuations in real GDP and the price level in the economy. It combines the aggregate demand curve with both the short-run and long-run aggregate supply curves to assess equilibrium conditions and economic performance.
- Aggregate Demand (AD)
- The AD curve represents the total quantity of goods and services demanded across the economy at different price levels. It is downward sloping, reflecting the inverse relationship between the price level and the quantity of goods and services demanded. As the price level decreases, people generally consume more, thus increasing real GDP.
- Short-Run Aggregate Supply (SRAS)
- The SRAS curve shows the total quantity of goods and services that firms are willing to produce at different price levels in the short run, given that some wages and prices are sticky. It is upward sloping because, in the short run, higher prices lead to increased production as firms are able to earn a greater profit.
- Long-Run Aggregate Supply (LRAS)
- The LRAS curve represents the economy’s maximum sustainable output, or potential GDP, when all resources are fully and efficiently utilized. It is vertical at the potential output level because, in the long run, the economy adjusts to this level of output regardless of the price level. This reflects the idea that output in the long run is determined by factors like technology, capital, and labor rather than the price level.