Why aggregate demand must be equal to aggregate supply?
Because if it's not equal to each other then country does not grow economic growth systematically
Why aggregate demand must be equal to aggregate supply?
Introduction:
Aggregate demand (AD) refers to the total demand for goods and services in an economy at a given time, while aggregate supply (AS) represents the total supply of goods and services produced by all firms in an economy. It is important for aggregate demand to be equal to aggregate supply for several reasons, as explained below.
1. Macroeconomic equilibrium:
When aggregate demand is equal to aggregate supply, an economy is said to be in macroeconomic equilibrium. This implies that the quantity of goods and services demanded by consumers is equal to the quantity supplied by producers, resulting in a stable economy with no excess demand or supply.
2. Price stability:
When aggregate demand exceeds aggregate supply, it creates excess demand in the economy, leading to upward pressure on prices. This can result in inflation, as producers raise prices to meet the increased demand. On the other hand, when aggregate supply exceeds aggregate demand, it creates excess supply, which puts downward pressure on prices. This can lead to deflation, as producers lower prices to sell their excess inventory. By ensuring that aggregate demand equals aggregate supply, price stability can be maintained.
3. Full employment:
When aggregate demand is equal to aggregate supply, it indicates that resources in the economy are fully utilized. In this state, firms are producing at their maximum capacity, which promotes full employment. When aggregate demand falls below aggregate supply, it leads to a decrease in production and potential unemployment, while excess demand can lead to overutilization of resources and potential labor shortages.
4. Economic growth:
When aggregate demand equals aggregate supply, it promotes economic growth. This is because when firms produce at their maximum capacity to meet the demand, it stimulates investment, job creation, and overall economic activity. Economic growth is essential for improving living standards, reducing poverty, and increasing the overall well-being of individuals in society.
Conclusion:
In summary, aggregate demand must be equal to aggregate supply to achieve macroeconomic equilibrium, price stability, full employment, and sustainable economic growth. Maintaining this balance is crucial for a stable and prosperous economy.
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