Aggregate Demand | A-Level Economics Notes
These revision notes cover everything you need to know about Aggregate Demand for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is aggregate demand?
Aggregate demand is the total planned spending on goods and services in the economy at each price level.
What are the factors of aggregate demand?
AD = C + I + G + (X-M)
- consumer spending
- real incomes
- consumer confidence
- interest rates
- business spending on capital goods
- business confidence (accelerator theory)
- interest rates
- government spending
- state of the economy
- the budget
- net exports
- exchange rates
- raw material prices
- competitiveness
What is the accelerator effect?
The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.
What is the multiplier effect?
When an increase in aggregate demand leads to a further increase in aggregate demand.
- for example, if the government reduce income taxes
- people would see an increase in real incomes
- this would lead to an increase in consumer spending
- businesses would expect to increase their output
- therefore businesses might increase their spending on capital goods and employ more staff
- this would lead to a further increase in AD
k = 1/(1-MPC)
What is marginal propensity to consume?
If someone receives an extra £1 of income, MPC is the proportion that would be spent.
Marginal propensity to consume + marginal propensity to withdraw = 1
Withdrawals in the circular flow of income: imports, taxes, savings.
Summary questions
- what is aggregate demand?
- what are the factors of aggregate demand?
- what is the accelerator effect?
- what is the multiplier effect?
- what is marginal propensity to consume?
A-Level Economics Tutoring
I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.