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Aggregate supply and demand curves, read from the axes out

The AD–AS graph shows economy-wide output and the price level, helping explain changes in spending and productive capacity.

Hana Yoshida

By Hana Yoshida · Markets Reporter

4 min read

An aggregate supply and demand curve graph maps the economy as a whole rather than one market. Khan Academy defines aggregate demand, or AD, as total spending on domestic goods and services and aggregate supply, or AS, as the output firms produce and sell, measured as real GDP. Their intersection marks the model’s short-run equilibrium price level and real GDP, according to OhioLink’s OpenStax material.

Read the diagram in order: check the axes, identify whether supply means short-run AS or long-run AS, find the intersection, then ask whether a change involves spending or productive capacity.

How to read the graph

The horizontal axis is real GDP, while the vertical axis is the price level, a broad price index such as the GDP deflator or Consumer Price Index. That differs from a graph for one product, which uses the price and quantity of that particular good or service, OhioLink explains.

The downward-sloping AD curve shows total spending at different price levels. The upward-sloping line is usually short-run aggregate supply, or SRAS, which shows a positive relationship between the price level and real GDP in the short run, according to Khan Academy.

Khan Academy ties that upward slope to a condition: prices received for final output rise while input costs remain fixed. Higher expected profits can then encourage firms to increase production; the model does not assume that a higher price level raises output under every condition.

Where the curves cross

The AD–AS intersection is the model’s short-run equilibrium. At that point, aggregate supply equals aggregate demand, producing an equilibrium price level and real GDP, according to OhioLink.

Economists compare real GDP with potential GDP to assess the economy’s use of productive resources. Khan Academy describes potential GDP as output possible with existing labor, physical capital, technology and institutions fully employed, while the Reserve Bank of Australia describes it as output with labor and capital at normal full-utilization levels.

Potential GDP and LRAS

Educational material from Georgia Public Broadcasting represents long-run aggregate supply, or LRAS, as a vertical line at the economy’s sustainable production capacity. In this long-run view, the line marks potential GDP rather than a price-level-dependent quantity of output.

Georgia Public Broadcasting describes output to the left of LRAS as a recessionary gap, with unemployed resources. Output temporarily to its right is an inflationary gap, where pressure to produce beyond normal capacity can push on resources and prices.

Which curve moves?

Use a two-part test: did economy-wide spending change, or did the economy’s productive capacity or production conditions change?

  • AD shifts right when spending rises through consumption, business investment, government spending or foreign purchases of exports. Georgia Public Broadcasting identifies changes in those spending sources as AD shifters.
  • SRAS shifts right when the economy can produce more at a given price level. The Reserve Bank of Australia points to more labor or capital and higher productivity; Georgia Public Broadcasting also cites broad changes in wages, land prices and supply-chain conditions.
  • LRAS shifts right when a lasting increase in labor, capital or productivity raises potential GDP, according to the Reserve Bank of Australia.

Illustrative scenario: A broad rise in spending can shift AD right. The Reserve Bank of Australia says output may temporarily rise above potential GDP, with upward pressure on prices. A lasting increase in labor, capital or productivity can shift aggregate supply and potential GDP rightward, raising sustainable output.

Why this differs from a single-market graph

The two diagrams both use crossing lines, but their axes and meanings differ. A single-market graph covers the price and quantity of one good or service; the AD–AS model covers real GDP and a broad price index for final output across the economy, according to OhioLink.

  • Single market: price and quantity of a particular good or service. OhioLink says individual-product demand slopes downward largely because consumers can switch to substitutes.
  • AD–AS model: economy-wide price level and real GDP. OhioLink identifies wealth, interest-rate and foreign-price effects as explanations for the aggregate-demand curve’s downward slope.

Frequently asked questions

What do recessionary and inflationary gaps mean on an AD–AS graph?

Georgia Public Broadcasting describes a recessionary gap as output to the left of LRAS, where resources are unemployed or underused. It describes an inflationary gap as output temporarily to the right of LRAS, where pressure to produce beyond normal capacity can affect resources and prices.

Sources