Grade 12 Economics Unit 2: Aggregate Demand and Aggregate Supply Analysis

This unit 2 introduces the Aggregate Demand-Aggregate Supply (AD-AS) model, the primary framework economists use to analyze the overall economy. You’ll learn how these two forces interact to determine the national output (Real GDP) and the overall price level, and how shifts in these curves explain economic fluctuations like recessions and inflation.

---

Chapter 2.1 – Aggregate Demand

This chapter focuses on the total demand for all goods and services in an economy.

• Define Aggregate Demand (AD) as the total spending by households, firms, the government, and foreign buyers on domestically produced goods and services.
• Understand why the AD curve slopes downward, due to the wealth effect, interest-rate effect, and exchange-rate effect.
• Distinguish between a movement along the AD curve (caused by a change in the price level) and a shift of the AD curve (caused by changes in consumption, investment, government spending, or net exports).

---

Chapter 2.2 – Aggregate Supply

This section covers the total production of all goods and services in an economy.

• Define Aggregate Supply (AS) as the total quantity of output that firms are willing and able to produce at a given price level.
• Analyze the two types of AS curves:
  • Short-Run Aggregate Supply (SRAS): This curve is upward-sloping because of factors like sticky wages, meaning that as prices rise, firms’ profits increase, and they produce more.
  • Long-Run Aggregate Supply (LRAS): This curve is vertical at the level of potential output. In the long run, an economy’s ability to produce is based on its resources (labor, capital, technology), not the price level.

---

Chapter 2.3 – Equilibrium of Aggregate Demand and Aggregate Supply

Learn how the AD and AS curves come together to describe the state of the economy.

• Identify macroeconomic equilibrium at the intersection of the AD and AS curves.
• Demonstrate graphically the difference between:
  • Short-Run Equilibrium: Where the AD and SRAS curves intersect. This can result in a recessionary gap (high unemployment) or an inflationary gap (high inflation).
  • Long-Run Equilibrium: Where AD, SRAS, and LRAS all intersect, meaning the economy is at full employment. .
• Analyze how demand shocks (like a change in government spending) and supply shocks (like a change in oil prices) shift the curves and disrupt the equilibrium, leading to business cycles.

---

Learning Outcomes

By the end of this unit 2, you’ll be able to:

• Distinguish between a change in the quantity demanded and a change in aggregate demand.
• Discuss various explanations for wage and price stickiness in the short run.
• Demonstrate graphically the short-run and long-run equilibrium in relation to potential output.
• Explain how the AD-AS model is used to analyze economic fluctuations.