Point of Aggregate Demand Curve(in detail) Video Lecture | Economics CUET Preparation - Commerce

hi there Kyle purpura here with another
video within the realm of the topic of
macroeconomics this lesson is going to
focus on aggregate and demand which I'll
abbreviate as ad throughout this video
well in the video we're going to first
define aggregate demand talk a little
bit about what it is and why it is we're
going to look at the graph of aggregate
demand talk a little bit about why it
behaves the way it does and why it looks
the way it does when we graph it and
then we're going to go through some
exercises that deal with movements along
an aggregate demand curve versus shifts
of an aggregate demand curve talked a
little bit about why the aggregate
demand curve might shift and then I'm
going to refer you to a set of exercises
so that you can practice a little bit
first things first when we define our
Girt demand it is a similar definition
to GDP so we could take all household
consumption and all firms investment and
all government spending and the
difference between what a nation imports
versus what a nation
exports and we could come up with at any
point in time and Agri demand
output and when we look at that output
level at a number of different price
levels or inflation levels I guess you'd
want to say in a nation we would have a
great demand so usually how we define it
is total demand in an economy when we
take into account all households all
firms the government and the rest of the
world in terms of one nation's imports
and exports with with the relative rest
of the world another important
characteristic to keep in mind about
aggregate demand is that takes the price
level in a nation as measured by a price
index into account
when we go to graph an aggregate demand
curve on the vertical axis we have the
price level as measured by a price index
and on the horizontal axis we have real
GDP which is gross domestic product
which has been adjusted to take into
account the variations of inflation as
we can see the Agra demand curve slopes
downward to the right just like a demand
curve does and this means that at a high
price level a relatively high price
level real output or real GDP is
relatively low and this means that high
prices consumers aren't likely to buy as
many goods and services firms are not
likely to invest or borrow money
certainly to invest and if at high
prices a nation's exports are likely to
be more expensive to foreign consumers
and so we find then the output is
relatively low if price levels work to
lower a little bit as I've demonstrated
in the graph then output can increase
why is that well it's because consumers
can afford to purchase more goods and
services firms can afford to take out
more loans in order to invest and
because price levels are low the exports
from this nation look cheaper to a
foreign consumer now why does the
aggregate demand curve sloped downward
to the right there are three reasons the
first reason is one that we're going to
call the interest rate effect and this
really affects households when they're
purchasing big item goods like cars and
houses and college
classes maybe for their for their kids
and it also affects firms when firms are
taking out loans in order to invest and
create more jobs and purchase more
capital it any given interest rate if
price levels in the national economy go
up then what it is that we borrowed to
purchase becomes a lot less affordable
and so that we're not likely to take out
loans in order to purchase those things
so we would get then a combination of
high price levels and not much ability
than to take out loans to purchase goods
and services or from a firm's
perspective to take out loans in order
to invest if price levels were to come
down then we would get more economic
activity in more loans because those
goods and services that we wanted to
purchase with the loans become more
affordable the next is the wealth effect
and the wealth is a measurement of
households assets total assets so houses
jewelry vehicles maybe artwork that's in
the house if we were to add that up for
per individual and multiply that by
every person in the nation we would have
what we would call a measurement of
wealth if price levels international
economy go up then our assets feel or we
feel less wealthy because our assets
relative to those price levels now have
gone down at lower price levels the
opposite happens we may feel more
wealthy because our assets have greater
value where relative to the price level
and we will spend accordingly if we feel
wealthy we'll spend more money if we
don't feel as wealthy we spend his money
so the wealth effect really affects
consumption the next net export effect
just simply means that at high price
levels a nation's exports are more
expensive and so foreign consumers don't
buy as many
at lower price levels which I'm
indicating with my cursor this nation's
exports seem cheaper to foreign
consumers and so they buy more so in
each of these three cases we get a
tendency for the I regret supply curve
to slope downward to the right as it's
graphed against price levels in real GDP
when we talk about aggregate demand we
need to distinguish between movements
along a curve which I'm going to talk
about in this pane and then shifts in
the curve which I'm going to talk about
in the next pane movements along a curve
or simply happen when you have cheat
either changes in the price level or
changes in real GDP so if a question
gives a question a problem on an AP or
an IB exam talks about changes in the
price level and changes in real GDP and
asks you to speculate about what's
happening with the aggregate demand
curve you're not gonna move anything
you're just going to simply move up and
down an existing curve so at high price
levels like PL 1 we have a certain level
of real GDP output which we'll call Y
initial Y I if price levels were to
lower as I've indicated here to PL 1
then we would have a greater amount of
output so price levels in this case have
decreased and we've got greater output
if the reverse were to happen then we
would have less output if we have
something that impacts real GDP were
probably likely to have changes in the
price level so changes in the price
level change in real GDP will cause
movements up and down this curve if it
cause us to have to shift and create a
new curve
so how do we take a look at shifts or
changes in a curve
we'll start with Agra demand initial and
we're just going to imagine that
something in our national economy like
maybe overall income levels or better
profitability expectations among firms
or just an increase in consumer
confidence has changed and what happens
then is that we've had will have a
change in the entire structure of the
aggregate demand curve which will cause
us to have to change the aggregate
demand curve because you've had a
fundamental shift in the variables that
make up this curve so in this case let's
just assume that I've had an increase in
consumer confidence consumers are more
rosy for whatever reason this next month
about the future potential of the
economy and their role in it so if
they're rosier about that they're likely
to spend more money what happens well we
would have a an increase in aggregate
demand from ad initial to ad one as I
have indicated here so the entire curve
would shift right so you would have an
increase in real GDP at every single
price level what would happen if the
reverse were true what would happen if
we would have a decrease in consumer
confidence for example well the opposite
would occur we would have a left shift
of the Agra demand curve from ad initial
to ad in this case to and so we would
have a decrease in output at every
single price level
so what are some of the variables that
cause changes in aggregate demand I'll
give you a second to read over these
you'll want to commit these to memory I
guess until you get to a point where
they make sense so for example that you
know that if you have an increase in the
number of jobs and the national economy
more people are spending their money
that doesn't have anything to do with
price level or real output but and that
will affect Agri demand and cause an
increase or a right shift in aggregate
demand there are a lot of questions on
the AP and the IB examination that will
ask you to be able to shift the curve in
the proper direction and so you're going
to get need to get into habit of
practicing with these various variables
to see how they impact the aggregate
demand model time to practice now if you
go to the my Google Docs link that I
have included here and that I will embed
in this video you can download a
practice sheet and it is something then
that we as a class can correct or if you
send me an email about one of the
questions I will try to respond in a
timely fashion so that's it for
aggregate demand next time we're going
to talk about aggregate supply