This paper examines the relationship between aggregate demand, aggregate supply, and full employment in a national economy. It defines aggregate demand as the total desired expenditure by consumers, firms, government, and the foreign sector (AD = C + I + G + X – M), and aggregate supply as the total quantity of goods and services produced at every price level. The paper explains how increases in demand stimulate production and labor absorption, ultimately driving employment levels upward. It also clarifies the concept of full employment — the equilibrium state in which all willing and able workers can find work — and discusses how government intervention through demand creation can shift the AD curve to achieve this outcome.
The level of employment in any country depends on important economic factors, including production, demand, supply, consumption, and inflation. Employment can never increase or decrease without producing some effect on these factors; conversely, changes in these factors are what drive increases or decreases in the employment level. For example, a country cannot expect to raise employment without taking into account the production of goods and services, the demand for those goods, and the supply of the same.
When employment is low and the government wants to achieve full employment, it is important to study the economic factors of aggregate demand and aggregate supply, as they play the most crucial role in determining the level of employment in a country.
Aggregate demand is the sum total of demand for all goods and services in a country. In any economy, there exists more than one source of demand. It is not only the general public that seeks goods and services — the government and international buyers are also important sources of demand because they affect the production level. Aggregate demand is defined as "the total level of demand in the economy. It is the total of all desired expenditure at any time by all groups in the economy. The main groups who spend are consumers (consumption), firms (who spend on investment), government (government expenditure), and overseas (exports)." (Economics Glossary, Reference 1)
Total aggregate demand is therefore expressed as:
AD = C + I + G + (X – M)
Where:
C = consumption expenditure
I = investment expenditure
G = government expenditure
(X – M) = net exports (exports minus imports)
Aggregate demand and aggregate supply are distinct but interrelated concepts. Aggregate supply is the sum total of supply of goods and services at various price and demand levels in a country. When demand for a good increases, supply must also increase, or inflation is likely to set in. To avoid excessive inflation, production is expanded to meet the new demand level. Aggregate supply is thus "the total quantity supplied at every price level. It is the total of all goods and services produced in an economy in a given time period." (Reference 1)
With an increase in demand for goods and services, supply rises, which in turn increases the production level. However, to meet this new supply requirement, firms must invest more resources, including capital and labor. This leads to a higher employment level, as more job opportunities are created and more people are absorbed into industries.
Full employment is attained when everyone who is willing and able to work can find a job. There may still be some individuals left out of the job market due to seasonal factors, but full employment is commonly understood as "a situation where the labor market has reached a state of equilibrium — i.e., when those in the active labor force who are willing and able to work at going wage rates are able to find work. At this point the remaining unemployment would essentially be frictional." (Reference 2)
"Government shifts AD curve to reach full employment equilibrium"
You’re 71% through this paper. Sign up to read the remaining 1 section.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.