Aggregate Demand and Aggregate Supply

H1 Economics - syllabus 8843, 2026

Explain how total spending (AD) and total production (AS) determine a country's real output and price level, and why spending has a multiplied effect.

• Reading an AD/AS diagram

  AD/AS shows how total spending and total production set real output and the general price level.

• The components of aggregate demand

  AD = C + I + G + (X - M): consumption, investment, government spending and net exports.

• What drives consumption and investment?

  Consumption depends on income, wealth and confidence; investment depends on expected profits and interest rates.

• Government spending and net exports

  Government spending depends on policy; exports depend on world income, prices and exchange rates.

• Aggregate supply

  AS is flat when there is lots of spare capacity, then gets steeper, and is vertical at full employment.

• Equilibrium and how the economy adjusts

  If spending and output do not match, stock levels change and firms adjust output until they do.

• Trace an aggregate demand shock

  When spending changes, AD shifts, and output and prices move together.

• Aggregate supply shocks

  A rise in costs shifts AS up, so prices rise and real output falls at the same time.

• Spare capacity versus productive capacity

  Using idle resources raises output without raising capacity; productive capacity grows only with more or better resources.

• The multiplier effect

  An initial rise in spending raises national income by more, because one person's spending becomes another's income.

• Using AD/AS carefully

  A good AD/AS answer links evidence to the right curve, then says what the result depends on.

• Case study practice: when the tourists come back

  A whole H1 case study: 40 marks, about 90 minutes in the exam. Answer every part, then compare with the suggested answers.

Original teaching notes