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Homework answers / question archive / Draw a conventional aggregate demand curve on a graph
Draw a conventional aggregate demand curve on a graph. Then add three different aggregate supply curves, labeled: S1, a horizontal curve; S2, an upward-sloping curve; and S3, a vertical curve. All three supply curves intersect the AD curve at the same point. If AD were to increase (shift to the right), which AS curve would lead to: (a.) the biggest increase in output; (b.) the largest jump in price; and (c ) the least inflation?
In the initial equilibrium, all three supply curves intersect the demand curve (AD) at the same point, resulting in price P1 and quantity Q1. When the demand curve shifts to the right, a different equilibrium is reached for each of the three supply curves. (a.) S1, the horizontal supply curve results in the biggest increase in output, with equilibrium quantity increasing to Q3. Note that there is no change in price in that case; the entire effect of the demand shift occurs through a quantity change. The price elasticity of supply is infinite for a horizontal supply curve. (b.) S3, the vertical supply curve, results in the largest jump in price, with price increasing to P3. Note that in that case the entire effect occurs through price and that there is no change in quantity. The price elasticity of supply is zero for a vertical supply curve. (c.) Supply curve S1, the horizontal curve, results in the least inflation. With no change in the price of the commodity, any inflation index, such as the CPI, would be unaffected by the shift in demand.
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