Chapter 8, Problem 1E

To determine

The difference between the aggregate demand curve of an economy and the demand curve of a single product.

Answer to Problem 1E

The differences between aggregate demand curve of an economy and the demand curve of a single product are as follows:

• While aggregate demand is a macroeconomic concept, demand for a single product is a microeconomic concept.
• The negative slope of the aggregate demand curve that is the inverse relationship between price level and aggregate demand of the economy is explained by real-balance effect, interest-rate effect, and foreign-purchase effect. The inverse relationship between price and quantity demanded of a good is explained by substitution and income effect.
• The price level considered in the case of aggregate demand is a price index of a basket of representative goods and services. The price in case of demand for a single good is the price of that product only.

Explanation of Solution

Aggregate demand is a concept that includes the demand for all the goods and services that different sectors of the economy want to purchase at a point of time at different price levels. It is a macroeconomic concept. The demand for a single product is the quantity demanded of a single product by the consumers at different price levels. It is a microeconomic concept.

The inverse relationship between the aggregate demand and the price level is explained by real-balances effect, the interest-rate effects, and the foreign-purchase effect. The inverse relationship between price and quantity demanded of a good is explained by substitution and income effect. In the case of aggregate demand, the income effect does not work, as income rises when output increases in the economy, unlike the demand for a single product which assumes the income level to be constant.

Economics Concept Introduction

Aggregate demand curve- A downward sloping line that shows the relationship between price level and real gross domestic product.

Demand curve of a single product − A downward sloping line showing the relationship between price and demand for a particular product.