What Everyone Wants: Aggregate Demand

By Daniel Richards, Manzur Rashid, Peter Antonioni

Economies run on people, firms, and governments requiring and buying things. A need exists (demand) that firms fulfill (supply). Students of microeconomics spend time learning about the behavior of supply and demand in individual markets. Students of macroeconomics are interested in the economy as a whole, so the emphasis is on aggregate (that is, total) demand for goods and services and aggregate (total) supply.

More specifically, aggregate demand comprises the total demand for goods and services produced in the economy.

Aggregate demand is important because (along with aggregate supply) it determines a country’s GDP and price level (and therefore its inflation rate). Changes in aggregate demand also impact the level of unemployment.

Without understanding aggregate demand, policy-makers wouldn’t stand much of a chance of being able to control the economy. Indeed the main tools that policy-makers have at their disposal (monetary and fiscal policy) work by influencing aggregate demand.