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Figure 3 The aggregate supply and demand model 
Figure 3 shows that the aggregate demand curve slopes from left to right (ie demand will rise as prices 
fall because people can afford more) but may shift as shown. A shift may be due to a factor such as an 
increase or decrease in consumer confidence. This is explained below. 
2.2.2 Aggregate supply 
The aggregate supply refers to the ability of the economy to produce goods and services. Aggregate 
supply is positively related to the price level. This is because a price rise will make more profitable sales 
and encourage organisations to increase their output. The aggregate supply curve slopes upwards from 
left to right and does not shift in the short term, as shown in Figure 3. 
Where the aggregate demand curve intersects with the aggregate supply curve, the total demand for 
goods and services in the economy is equal to the total supply of goods and services in the economy. 
(This is known as the equilibrium level of national income.) 
Note that the graph highlights the fact that a change in either the aggregate supply or demand will have 
an effect on the price level and the national income. Assuming that employment levels are related to 
national income levels, the model shows how unemployment and inflation (a change in price level) 
could arise. 
2.2.3 A shift in aggregate demand 
Say, for example, that the equilibrium level is currently where national income = Y
0
and price = P
0 .
Then suppose there is a drop in consumer confidence so consumers stop spending (ie demand falls). 
The new equilibrium would be where national income = Y
1
and where price = P
1
. If, on the other hand, 
consumer confidence increased (for example due to more access to affordable credit), consumers would 
buy more (an increase in demand) and so the new equilibrium would be where national income = Y
2
and price = P
2.