Macro &Micro Economics Essay Example | Topics and Well Written Essays - 2000 words

Macro &Micro Economics - Essay Example 16). Within the vast arena of macroeconomics, the development of the model of Aggregate Demand and Aggregate Supply generally known as AD-AS model is of immense importance as it has been developed and applied for determining and evaluating the factors that are very useful in realizing the effects of Real Gross Domestic Product which is i.e, GDP deflated by the general price level. As a consequence the model also acts as a useful indicator for the determination of the inflation level of the economy (Taylor & Weerapana, 2009, p.695). The AD-AS model also incorporates the notion of micro economic concepts like demand and supply framework including equilibrium analysis (Karl, E, 2007, p. 409) and thus setting up a platform in accordance with the demand of the paper. Focus of the paper The paper will focus on the underlying mechanism of the aggregate demand (especially) and aggregate supply along with the concepts of volume of money demand and supply and its application and importance in the economy of the United States of America (US) with its recent financial crisis within the backdrop of the article, â€Å"It’s the Aggregate Demand, Stupid† written by Bruce Bartlett who has held senior policy roles in the administration of Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Pau. Crux of AD-AS model Before entering into the AD-AS model a short purview of the notion of law of demand and law of supply requires to be mentioned. The law of demand has been developed by the economists out of several criticisms (various exceptions like Giffen goods, Veblen effect) and the law basically states that for a normal commodity, there is an inverse relationship between the price of a particular commodity and the quantity demanded keeping all other things constant. The demand function can be stated as,signifying the inverse relation between price and quantity. A short mathematical and graphical explanation will m ake it clearer (Maurice & Thomas, p.43). Let, , (where a, b>0) be a linear demand curve which is taken for our purpose. Differentiating the above function with respect to Q we get, Therefore the slope of the curve is negative. The graphical representation is as follows: Fig.1 The law of demand (Maurice & Thomas, p.43) In the above diagram, at the price level P2, the quantity demanded was at the level Q2 when the price fell down to the level of P1, the quantity demanded rose to the level Q1. Thus the inverse relationship between the price and quantity as given by the law of demand is represented. The demand comes from the consumer’s angle in an economy that purchase goods and services in an economy for the maximization of their utility (Bhide, 2010, p. 313). The theory of supply on the other hand represents the positive relationship between the quantity and the price keeping all other things constant (Hussain, 2010, p. 214). It comes from the producer’s angle. More the commodity the producer sells more the price will it charge. Let a linear supply curve be considered as, . Now differentiating the