Question

The last few weeks have been eventful, to say the least, across the world. This week, we also happen to talk about Aggregate Demand and Aggregate Supply. As a result of Coronavirus, we have seen a decrease in Aggregate Demand, which has lead to our production to nearly halt. Think about some industry or type of firm that you maybe know more than the average person about and how it has been affected by the COVID-19 case. Then explain how this is demonstrated in our AD/AS model.

Try to focus on your individual firm/industry and the economic impact from the virus. It is fair game to talk about the effect of legislation concerning the virus, but we are not necessarily looking for critique or praise concerning legislation or individual politicians/leaders concerning the virus.

Answer 1

Answer: National income in an economy is in equilibrium at that level at which aggregate demand (AD) is equal to aggregate supply (AS). i.e. AD = AS .

Equilibrium condition of AD = AS implies that whatever is produced in the economy (AS) is either consumed by the households or invested by the firms.

In this question as there is a crisis going on COVID-19, many industries are facing problems.

when AD> AS = it means that planned expenditure (AD) on goods and services is more than planned output(AS). as a result, Producers' inventories will fall below the desired level. To meet the excess demand, firms will start raising production until inventories (stocks) reach the desired level, and AS is equal to AD.

Like in this scenario the tourism industry has affected a lot. Millions of jobs are in danger of this sector.