Analysis of the AD-AS Model: Aggregate Demand and Supply Dynamics

The AD-AS model is a macroeconomic tool used to explain price levels and output by analyzing the relationship between Aggregate Demand (AD) and Aggregate Supply (AS). The AD curve slopes downward, indicating that as prices increase, aggregate demand decreases. The AS curve slopes upward, showing that as prices increase, aggregate supply also increases. The intersection of these curves determines the equilibrium point, which sets the price level. If the equilibrium is on the flatter part of the AS curve, the economy is far from its potential GDP and may experience high unemployment. Conversely, if the equilibrium is on the steeper part, the economy is close to potential GDP with lower unemployment. This model is crucial for understanding how macroeconomic goals can be achieved.

ADAS

Aggregate Demand-Aggregate Supply Model-
AD-AS model refers to a macroeconomic model through which a thorough explanation
of the price level and output can be determined effectively and efficiently by assessing the
relationship between Aggregate Demand and Aggregate Supply. The model has been given by
the famous economist Keynes (Candela and Geloso, 2018).
AD curve is a downward sloping curve from left to right. It signifies that with a steady
increase in the level of price, The Aggregate demand in the economy can slide downwards. The
reason for this is that increase in price affects the overall level of demand in the market
(Goldfarb and Tucker, 2019).
AS curve is an upward sloping curve from left to right. With an increase in the level of
price, there can be a change in the Aggregate Supply. This is so because increase in price can
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lead towards an increase in the overall supply in the market. The reason for this is that increase
in price will lead towards increase in the market supply.
When both the AD and AS curve meet, the economy strikes an equilibrium. Therefore the
point at which both of these curves are meeting ensures that the price can be set here. Thus in
this way it can be said that this helps a lot in determining the overall price level so that the goals
and objectives of the economy can be met.
If the equilibrium point is anywhere near the flat range of AS then the economy is not
close to the potential GDP and can experience a higher-level of unemployment.
However, If the equilibrium is anywhere near the steep range of AS then the economy is
close to the potential GDP and will have a lower unemployment rate.
REFERENCES
Books and Journals:
Candela, R. A. and Geloso, V. J., 2018. The lightship in economics. Public Choice. 176(3).
pp.479-506.
Goldfarb, A. and Tucker, C., 2019. Digital economics. Journal of Economic Literature. 57(1).
pp.3-43.
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