Report on the Application of AS-AD Model in Business Economics

This report provides an analysis of the AS-AD (Aggregate Supply-Aggregate Demand) model in the context of business economics. It begins with an introduction to the concept of economic equilibrium and the importance of maintaining a stable economic environment. The report then delves into the AS-AD model, explaining how the intersection of aggregate demand and supply curves determines equilibrium price and output levels. A significant portion of the report is dedicated to examining shifts in aggregate demand, discussing the impact of expansionary and contractionary policies on price levels and output in both the short and long run. The report uses graphical illustrations to demonstrate these shifts and their effects. The conclusion emphasizes the importance of understanding the AS-AD model for businesses to analyze macroeconomic policies and make informed decisions based on market conditions.

ECONOMICS FOR
BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
AS-AD model..............................................................................................................................1
Shifts in aggregate demand.........................................................................................................2
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

ILLUSTRATION INDEX
Illustration 1: Graph 1......................................................................................................................2
Illustration 2: Graph 2......................................................................................................................3
Illustration 3: Graph 3......................................................................................................................4

INTRODUCTION
In the market, every firm gets highly affected with the availing business environment.
Further, mainly the economic environment has gained a huge priority to influence the market as
any change in it will directly have an impact on the demand and supply of goods and services
provided in market (Ackermann ed., 2012). Thus, it is important to maintain equilibrium
situation in economy so as to balance the demand and supply in a proper manner. In this report,
an analysis is made to identify importance of stable economic equilibrium situation in the
market.
AS-AD model
Equilibrium refers to the state in which economic forces which mainly include supply
and demand are highly balanced. Further, it can be said that if there is no influence by the
external forces than price and quantity will remain constant at an equilibrium value (Bernstein,
2012). It is seen that aggregate demand curve and supply curve do not shift independently as
they are indirectly related to each other and have a joint impact on the price or output of products
and services. Thus, it can be determined by using the AS-AD model.
1

From the above table, it can be determined that with the intersection of short-run and
long-run aggregate supply curve and the aggregate demand curve, they together develop the
situation of equilibrium level of price as well as output. Thus, variations in demand and supply
curve develops with the problems in market (De Clercq, Danis and Dakhli, 2010).
Shifts in aggregate demand
In this, it has been stated that the main cause for shift in economy is due to aggregate
demand. Further, this can be affected by many factors which include consumers, government,
etc. Thus, any type of expansionary policy highly shifts demand curve to the left. Moreover, as
the long-term supply curve is fixed due to many reasons which may involve factors of
production, short-term aggregate supply shifts towards the left (Fidrmuc and Korhonen, 2010). It
depicts that with the change in aggregate demand, it will only have impact on the price of
products and services which are served to the customers.
2
Illustration 1: Graph 1
(Source: Welkar, 2017)

Further, in the long run, level of expected prices is aligned with the actual price level
determined by people. This is because; firms, workers and producers make adjustments with
their expectations. With this, short-run aggregate supply curve shifts with the aggregate demand
curve till the time when long-run, short-run and aggregate demand curve; all intersect each other
at a single point. In the above graph, it has been shown by point C where new equilibrium
situation has been achieved (Kiss, Danis and Cavusgil, 2012). Further, it can be said that with the
expansionary policy, level of price and output has increased in short run but in long run, only
price level is increased.
3
Illustration 2: Graph 2
(Source: Welkar, 2017)

Above graph shows the opposite situation of prior one. In this, aggregate demand curve
shifts to the left side. It can be depicted by saying that if Fed pursues with the contradictory
monetary policy, than aggregate demand curve moves to the left side. It can be seen in the graph
that demand curve moves from 1 to 2. Thus, the intersection of short-run curve 1 and the demand
curve has moved to point B. As a result, level of output and the price has decreased. Thus, it
shows a new point of short-run equilibrium. But in the long run, price level matches with the
expected price made by firms, producers, etc. With the contractionary policy, it has a decrease in
output and price in the short run but in the long run, only price level is decreased (Mandell,
2015).
Thus, by the same, it can be said that with the change in demand and supply curve,
equilibrium level also gets altered accordingly. Moreover, it has also been evolved that there are
changes in the short-term and long-run effects as mostly, the output level is decreased or
increased in the short-run but when it is extended to the long run then only the price level is
affected. Therefore, determination of supply and demand of products and services help in
providing the prices for products developed in market (Sanchez and Ricart, 2010). Thus, it is
highly required to attain a stable equilibrium position in the economy so as to manage the
demand and supply of goods in an efficient manner. Moreover, this reduces with the situation of
high prices as with equilibrium, market will be stable and can help to attain a sound economy in
the market. Thus, it can be said that with the use of AS-AD model, effects of macroeconomic
4
Illustration 3: Graph 3
(Source: Welkar, 2017)

policies are determined in an effective manner. This is highly helpful for company to develop
their products as per the availing situation in market which includes demand as well as supply for
certain products.
CONCLUSION
From the above report, it can be concluded that with the changes in demand and supply,
position of equilibrium changes from one point to other in the economy. Further, it has a great
impact on the factors of production as they have to make modifications with the demand and
supply of products in market. Thus, it is important for the government to develop policies which
have a positive impact on companies and can grow in the industry. AS-AD model is highly
efficient for every organization to analyse the effects of macroeconomic policies. Thus, it is a
powerful tool to collect the information related to terms included in macro-economy.
5

REFERENCES
Journals and Books
Ackermann, S. J. ed., (2012). Are small firms important? Their role and impact. Springer
Science & Business Media.
Bernstein, A. (2012). The case for business in developing economies. Penguin UK.
De Clercq, D., Danis, W. M. and Dakhli, M. (2010). The moderating effect of institutional
context on the relationship between associational activity and new business activity in
emerging economies. International Business Review. 19(1). pp.85-101.
Fidrmuc, J. and Korhonen, I. (2010). The impact of the global financial crisis on business cycles
in Asian emerging economies. Journal of Asian Economics. 21(3). pp.293-303.
Kiss, A. N., Danis, W. M. and Cavusgil, S. T. (2012). International entrepreneurship research in
emerging economies: A critical review and research agenda. Journal of Business
Venturing. 27(2). pp.266-290.
Mandell, L. C. (2015). Misogynous Economies: The Business of Literature in Eighteenth-
Century Britain. University Press of Kentucky.
Sanchez, P. and Ricart, J. E. (2010). Business model innovation and sources of value creation in
low‐income markets. European management review. 7(3). pp.138-154.
Online
Welkar, J. (2017). The battle of ideas: Hayek versus Keynes on Aggregate Supply. [Online].
Available through: <http://welkerswikinomics.com/blog/2011/04/08/1643/>. [Accessed
on 13th December 2017].