Glossary term
Aggregate Demand: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Aggregate demand (AD) is the total planned spending on an economy’s final goods and services at a given price level. It has four parts: household consumption, planned investment, government spending and net exports. In a fixed-price economy, output adjusts until it equals aggregate demand, which sets the level of income.
In more detail
When planned spending exceeds output, firms find stocks falling and raise production; when it falls short, stocks pile up and firms cut output. The economy therefore settles where output equals aggregate demand. This is why a fall in investment or consumption reduces income by more than the initial change, and why governments use spending and taxes to steady demand.
Example
If households plan to spend ₹60 lakh crore, firms to invest ₹20, the government to spend ₹15 and net exports are ₹−5, aggregate demand is 60 + 20 + 15 − 5 = ₹90 lakh crore.
Key points
- AD = C + I + G + (X − M).
- It is a planned (ex ante) quantity.
- A rise in AD raises output and income through the multiplier.
Common mistake
Confusing aggregate demand with the quantity demanded of one good.
Related terms
Marginal propensity to consumeMultiplier
Where it is explained
This term is explained in Class 12 Macroeconomics Chapter 4: Income Determination.