Answer to Question #116497 in Macroeconomics for ola

Question

If one watch costs $500, what is the aggregate demand for watches in
Stickmanland? Would a change in the cost of watches result in a change in aggregate
demand? How

Answer 1

Aggregate demand - the total solvent demand for all goods and services produced in the economy.

The analysis of aggregate demand is in many ways similar to the analysis of individual and market demand. Aggregate demand is influenced by many factors, but the main factor determining its value is the price level in the economy. The relationship between the value of AD and the price level is inverse. However, the explanation of this dependence is more complicated than in the case of individual and market demand. This is due to the fact that the effects of income and substitution in this case will not “work”, since the effect of these effects is manifested in the case of changes in prices for one product and with the same prices for others.

The inverse relationship between the volume of aggregate demand and the price level in the economy cannot be explained with the help of the law of diminishing marginal utility, since it applies only to a single product. We, while exploring aggregate demand, are dealing with an aggregate indicator. Thus, the demand presented by many buyers for different goods is aggregated into aggregate demand. The inverse relationship between the price level in the economy and the volume of aggregate demand is explained by the following laws: Interest rate effect,Wealth effect,The effect of import procurement.

These are price factors. There are also priceless factors. Since the AD value is made up of four main components, four groups of non-price factors are distinguished, affecting respectively household consumption expenditures, business investment expenses, government procurement of goods and services, and net exports.

Therefore, based on the above scientific explanations, the change in aggregate demand will be insignificant when the price of the specified product changes.