In the first place, before we think about Aggregate demand and Aggregate supply, we should know about them. That’s why, we look the definition of these words.
Aggregate Demand is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is the demand for the gross domestic product of a country. It specifies the amount of goods and services that will be purchased at all possible price levels.
The aggregate demand curve illustrates the relationship between two factors: the quantity of output that is demanded and the aggregate price level. Aggregate demand is expressed contingent upon a fixed level of the nominal money supply. There are many factors that can shift the AD curve. Rightward shifts result from increases in the money supply, in government expenditure, or in autonomous components of investment or consumption spending, or from decreases in taxes.
An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources: AD=C+I+G+(X-M)
C-is consumption (may also be known as consumer spending), which is given by
where is consumers' income and the taxes paid by consumers,
Aggregate supply---is the total supply of goods and
services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy. Aggregate supply is targeted by government "supply-side policies" which are meant to increase productive efficiency and hence national output. Some examples of supply-side policies include
education and training, research and development, supporting small/medium entrepreneurs, decreasing, business taxes, making labour market reforms to diminish frictions that may hold down output, and investing in infrastructure.
There are generally three alternative degrees of price-level responsiveness of aggregate supply. They are: