Overview of Interrelated Aggregate Demand and Aggregate Supply Curves

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Aggregate Supply Curve Variables One of the major facets and functions of modern macroeconomic and microeconomic theory are the interrelated aggregate demand and aggregate supply curves. This report will focus on the latter as well as the variables that are typically accepted to affect the aggregate supply curves. An example graph showing a hypothetical shift in the aggregate supply curve is included in the appendix of this report. Aggregate Supply Curve Summary As noted in the introduction, there are two major components to the subject of the aggregate supply curve that beginners must understand. First, the aggregate supply curve interacts with the aggregate demand curve to set an equilibrium price. In other words, given a certain amount of demand and a certain amount of supply, there is a equilibrium price where shortages do not occur but the supply on hand sells out entirely. If the price is set too high, then sales will plummet. If the price is set to low, the supply will drop too quickly and cause a shortage while at the same time yielding less revenue that what was possible given the supply and demand correlation (Elwood, 2010). The other, and very related, point inferred in the prior paragraph is that supply and demand set the price at which a good is sold, more often than not. If there is a glut of items on the shelf, prices will typically have to come down. If there is a massive amount of demand for a product, then prices will generally go as high as the market

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