Aggregate Demand :-
The term 'aggregate demand' means the total value of final goods and services that is demanded in an economy during a year. In other words, it refers to the total amount of expenditure people spent on final goods and services in an economy during a year.
Components of Aggregate Demand:-
The main components of aggregate demand are -
a. Private Consumption demand (C)
b. Private Investment demand (I)
c. Government demand for goods and services(G)
d. Net Exports( X - M )
Symbolically,
AD = C + I + G + ( X - M )
In a two sector economy,
AD = C + I
Aggregate Supply:-
The term ' Aggregate Supply ' refers to the total quantity of final goods and services, that is produced in an economy during a year time. In other words, it is the aggregate planned output of an economy during a year time.
Components of Aggregate Supply:-
There are two main components of aggregate supply -
a. Consumption ( C )
b. Saving ( S )
Symbolically,
AS = C + S = Y
Consumption Function:-
The consumption function of propensity to consume refers to the relationship between consumption and income. It is a functional relationship between two aggregates, i.e. , between ' total consumption ' and ' gross national income '.
Symbolically,
C = f( Y )
Where,
C = consumption
Y = income
Here, the consumption function indicates a functional relationship between C and Y, where C is the dependent variable and Y is the independent variable, i.e. C is dependent on Y.
Average Propensity to Consume(APC):-
Average propensity to consume (APC) refers to to the value of consumption function at a particular level of national income. In other words, average propensity to consume refers to the ratio of aggregate consumption to national income.
Symbolically,
APC = C/Y
Where,
APC = average propensity to consume
C = Aggregate consumption
Y = Aggregate income
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