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VARIABLE INPUT: An input whose quantity can be changed in the time period under consideration. This should be immediately compared and contrasted with fixed input. The most common example of a variable input is labor. A variable input provides the extra inputs that a firm needs to expand short-run production. In contrast, a fixed input, like capital, provides the capacity constraint in production. As larger quantities of a variable input, like labor, are added to a fixed input like capital, the variable input becomes less productive. This is, by the way, the law of diminishing marginal returns.

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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
Two Similar Curves

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.

<= AGGREGATE DEMANDAGGREGATE DEMAND CURVE =>


Recommended Citation:

AGGREGATE DEMAND AND MARKET DEMAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2015. [Accessed: March 28, 2015].


Check Out These Related Terms...

     | change in aggregate demand | change in aggregate expenditures | aggregate demand shifts | slope, aggregate demand curve | real-balance effect | interest-rate effect | net-export effect |


Or For A Little Background...

     | aggregate demand curve | aggregate expenditures | aggregate demand determinants | demand | demand curve | income effect | substitution effect | price level | law of demand | macroeconomic theories | macroeconomic markets | macroeconomic sectors |


And For Further Study...

     | aggregate supply | aggregate market analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics |


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