Aggregate demand or

Aggregate expenditure
Aggregate demand (AD) or Aggregate expenditure refers to
the total value of final goods and services which all the
sectors of an economy are planning to buy at given level of
income during a period of one accounting year.

Aggregate expenditure refers to the planned expenditure not

the actual expenditure.

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PREMIUM NOTES
 Components of aggregate
demand

Private (household)
final consumption
expenditure (C) 1
Investment
2 expenditure (I)

Government
expenditure (G)
3

4 Net exports
(X - M)

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 Components of aggregate
demand
.
Aggregate demand consists of 4 elements:-

1. Private (household) final consumption expenditure (C) :-

It refers to the total expenditure incurred by the household on purchase of

goods and services during an accounting year.
Example:- expenditure on purchase of tea, sugar, oil etc.

2. Investment expenditure (I) :-

it refers to the total expenditure Incurred by the private firms on capital

goods during an accounting year.
Example: expenditure on purchase of machinery, car or any other asset.

3. Government expenditure (G) :-

It refers to the total expenditure incurred by government on consumer or

capital goods to satisfy the needs of an economy. Consumption expenditure
by government:- expenditure on education, transport etc. Investment
expenditure by government:- expenditure on construction of highway,Power
plants etc.

4. Net exports (X - M) :-
(Exports - Imports)
Export refers to the demand for goods produced within the domestic
territory of a country by the rest of the world.
Import refers to the demand of the residents of a country for the goods
produced abroad.

Aggregate Demand=C+I+G+(X-M)
But in the present class we just had to learn aggregate demand which is the
addition of consumption and investment expenditure.

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 Aggregate
Supply

It refers to the money value of goods and

services that all the producers are willing
to supply in an economy in the given time
period.

Aggregate Supply (AS) = National Income

(Y)

* Components of Aggregate Supplv (AS) or

Income (M) - The income of a consumer
can be consumed (C) or saved (S)

Y=C+S

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 Consumption function
(propensity to consume)

It refers to the functional relationship between

consumption and National income.

C = f(Y)
C = Consumption
Y = National Income
f = functional relationship

It represents the willingness of households to

purchase goods and services at the given level
of income during a given time period.
It shows the consumption level at different
level of income.

C = C(bar) + bY

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PREMIUM NOTES
 types of propensity to
consume

1. Average Propensity
to Consume (APC)

It refers to the ratio of consumption expenditure to the corresponding

level of income
In other words, it shows how much income is consumed by the consumer.

APC = Consumption (C)

Income (Y)

2. Marginal Propensity to
Consume(MPC)

It refers to the ratio of change in consumption and change in total income.

In other words, it shows the amount of additional income consumed by the
consumer.

MPC = Change in Consumption ( C) ∆

Change in Income ( Y)∆

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 Linear Consumption function

In order to calculate the level of consumption at any level of income we

just need few basic things which are as follows:-
C (Autonomus Consumption)
Level of Income at which consumption is to be calculated.
MPC(Marginal propensity to consume)

Consumption and Saving functions

are complementary

Both Consumption and Saving curve are complementary to each other as

they together make up the income.
Therefore, if one of them is known then other can be easily obtained

S=Y-C and C=Y-S

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 Investment function

Investment refers to the expenditure incurred on creation of new assets

Example: Investment on building, Machinery etc.
Basically investments are of 2 types:-

1. Autonomous Investment

It refers to the investment which is not affected by the change in level of

income and is not induced for profit motive.
It is the basic and necessary investment which is not guided for profit
motive
This is generally made by the government on infrastructural activities.
It is income inelastic (investment remains constant even when income
increases)

2. Induced Investment

It refers to the investment which depends upon the profit expectations.

It is directly influenced by the income level.
i.e. if income increases then investment also increases

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 Important terms

1. Full employment:-

It refers to a situation in which all those who are willing and able to
word get work without any undue difficulty.
Under full employment there can be 2 types of unemployments-

Fictional unemployment (temporary unemployment):-

(Exist during the period when workers leave one job and join the other)

Structural unemployment:-
It refers to the unemployment in which people remains unemployed due
to mismatch between unemployed persons and the demand for specific
type of workers

2. Involuntary unemployments-

It refers to a condition of unemployment in which all those who are

willing and able to work at the existing wage rate doesn't get work.

3. Voluntary unemployment:-

It refers to a condition of unemployment in which persons are

unemployed because they are not willing to work at the existing wage
rate.

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