📊 Aggregate Demand and Related Concepts

📘 Macro Economics – Class 12

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🔹 1. Meaning of Aggregate Demand (AD)

Aggregate Demand refers to the total demand for final goods and services in an economy at a given price level and during a given period of time (usually one year).

👉 In simple words, Aggregate Demand shows total spending by all sectors of the economy.

🧠 It includes spending by:

• 👨‍👩‍👧 Households
• 🏭 Firms
• 🏛️ Government
• 🌍 Foreign sector

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🔹 2. Components of Aggregate Demand

🍽️ (a) Consumption Expenditure (C)

Consumption expenditure is the money spent by households on goods and services.

• 🥗 Food
• 👕 Clothing
• 🏫 Education
• 🚍 Transport
• 📱 Daily-use services

📌 Consumption depends mainly on income level.
📌 It is the largest component of Aggregate Demand.

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🏗️ (b) Investment Expenditure (I)

Investment refers to expenditure by firms on:

• 🏭 Machinery
• 🏢 Buildings
• 🛠️ Tools and equipment
• 📦 Change in stock (inventories)

📉 Investment depends on:

• 💰 Rate of Interest
• 📈 Expectations of future profits

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🏛️ (c) Government Expenditure (G)

Government expenditure includes spending by the government on:

• 🛣️ Roads
• 🏥 Hospitals
• 🏫 Schools
• 👮 Salaries of government employees

📌 Government expenditure is autonomous in nature.
📌 It does not directly depend on income.

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🌍 (d) Net Exports (X − M)

Net Exports is the difference between:

• 📦 Exports (X): Goods sold to other countries
• 🛒 Imports (M): Goods bought from other countries

📌 Net Exports = Exports − Imports
📌 Can be positive, negative, or zero.

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🔹 3. Formula of Aggregate Demand

📌 Four-Sector Economy:

AD = C + I + G + (X − M)

📌 Two-Sector Economy:

AD = C + I

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🔹 4. Aggregate Demand Curve 📉

The Aggregate Demand curve shows an inverse relationship between:

• 💲 Price Level
• 📊 Aggregate Demand

📌 When price level falls → Aggregate Demand rises
📌 The AD curve slopes downward from left to right

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🔹 5. Reasons for Downward Slope of AD Curve

💸 (a) Purchasing Power Effect

Lower price level increases the real value of money, leading to higher consumption.

🏦 (b) Interest Rate Effect

Lower prices reduce the demand for money, lowering interest rates and increasing investment.

🌐 (c) Foreign Trade Effect

Lower domestic prices make exports cheaper and imports expensive, increasing net exports.

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🔹 6. Related Concepts

🧮 (a) Consumption Function

The Consumption Function shows the relationship between income and consumption.

📌 Formula:
C = a + bY

• a = Autonomous Consumption
• b = Marginal Propensity to Consume (MPC)
• Y = Income

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📈 (b) Propensity to Consume

1️⃣ Average Propensity to Consume (APC)

APC = C / Y

2️⃣ Marginal Propensity to Consume (MPC)

MPC = ΔC / ΔY

📌 MPC lies between 0 and 1.

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⚙️ (c) Autonomous Expenditure

Autonomous expenditure is the expenditure which is independent of income.

• 🏛️ Government spending
• 🍽️ Autonomous consumption

📌 It occurs even when income is zero.

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🔹 7. Importance of Aggregate Demand ⭐

• 📊 Helps in determining national income
• 👷 Explains employment levels
• 📉 Explains inflation and deflation
• 🏦 Helps government frame fiscal and monetary policies

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🔹 8. Conclusion 📝

Aggregate Demand is a fundamental concept of macroeconomics. It explains how total spending affects income, output, and employment in an economy and helps in understanding economic stability and growth.