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BUDGET CONSTRAINT: The alternative combinations of two different goods that can be purchased with a given income and given prices of the two goods. This budget constraint, also termed budget line, plays a major role in the analysis of consumer demand using indifference curve analysis. Indifference curves represents the "willingness" aspect of consumer demand, the budget constraint captures the "ability". One key consumer demand topic is to analyze how consumer equilibrium is affected by changes in the price of one good. Then end result of this analysis is a demand curve. For more fascinating uses of the budget constraint and indifference curves, and consumer demand analysis, see income-consumption curve and price-consumption curve.
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                           AGGREGATE DEMAND AND MARKET DEMAND: The aggregate demand curve, or AD curve, has similarities to, but differences from, the standard market demand curve. Both are negatively sloped. Both relate price and quantity. However, the market demand curve is negatively sloped because of the income and substitution effects and the aggregate demand curve is negatively sloped because of the real-balance, interest-rate, and net-export effects. | Two Similar Curves | 
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To illustrate the specific aggregate demand and market demand curve similarities and differences consider the graph of a negatively sloped curve displayed here. Is this a market demand curve or an aggregate demand curve? A cursory look suggests that it could be either.To reveal the similarities between the both curves, click the [Market Demand] and [Aggregate Demand] buttons. Doing so illustrates that both curves are negatively sloped, with each virtually overlaying the other. Consider the differences between these two curves. - First, note that for the market demand curve, the vertical axis measures demand price and the horizontal axis measures quantity demanded. For aggregate demand curve, however, the vertical axis measures the price level (GDP price deflator) and the horizontal axis measures real production (real GDP).
- Second, the negative slope of the market curve reflects the law of demand and is attributable to the income effect and the substitution effect. In contrast, the negative slope of the aggregate demand curve is based the real-balance effect, interest-rate effect, and net-export effect. Similar, but different.
Most notable, the differences between market demand and aggregate demand mean that it is not possible to merely add up, or aggregate, the market demand curves for the thousands of goods produced in the economy to derive the aggregate demand curve. The aggregate demand curve dances to its own music and plays be its own set of rules.
Recommended Citation:AGGREGATE DEMAND AND MARKET DEMAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2013. [Accessed: December 13, 2013].
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State of the ECONOMY
Consumer Price Index W
September 2013
230.537
Up slightly Source: Bureau of Labor Statistics
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BLUE PLACIDOLA
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Today, you are likely to spend a great deal of time wandering around the downtown area hoping to buy either a genuine down-filled snow parka or throw pillows for your living room sofa. Be on the lookout for the last item on a shelf.
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The portion of aggregate output U.S. citizens pay in taxes (30%) is less than the other six leading industrialized nations -- Britain, Canada, France, Germany, Italy, or Japan.
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"Follow effective action with quiet reflection. From the quiet reflection will come even more effective action. " -- Peter F. Drucker, author
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CPI
Consumer Price Index
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