Question

Why is there a need for an aggregate demand and aggregate supply model of the economy? Why can’t the supply and demand model for a single product explain developments in the economy?

Answer 1

There is a need for aggregate demand and aggregate supply in the economy because in an economy there are many different goods and services produced in the economy.

A demand and supply of a single good will take different factors into account while establishing an equilibrium like taste and preference, substitute and complements of the goods etc. all these are very small factors when the economy as a whole is concerned. They don't' cover the whole picture or the economy as a whole.

In an aggregate demand and supply curve the macro factors like income, government expenditure, and supply shocks etc are considered which affect the economy as a whole. This can't be explained by taking a single product or a demand and supply curve of a single product.