Aggregate Demand and Aggregate Supply

In this economic cartoon, it shows how income and prices are constantly going through expansionary and contraction phases in our economy. Business cycles are economy wide fluctuations in total national output, income, and employment, usually lasting for period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of economy. They are caused by exogenous (outside sources) and endogenous (within). These can lead to economic indicators, like GDP, unemployment rate, and inflation. We get economic indicators by aggregate demand and aggregate supply.

Aggregate demand is the sum of these four groups of demands: households (consumption, C), firms (investment, I), government (G), and foreign trade (net exports, X). This looks like the equation:
AD = C+I+G+X
Aggregate supply describes how much output businesses would willingly produce and sell given prices, costs, and market conditions.

On a graph, the aggregate demand curve is always downward-sloping and the aggregate supply curve is always upward-sloping. The AD curve shows what everyone in economy would buy at different price levels (monetary policy, fiscal policy, and other forces). The AS curve shows quality of goods and services that businesses are willing to produce and sell at each price level (price level and costs, potential output, and capital, labor, technology).

For the first economic indicator, GDP, it is measure of market value of all final goods and services produced in country during year. It's goal is to tell us what is going on with output. (Is there a growth or contraction?) If there is high GDP, then we have a strong economy; if there is low GDP, then we have a weak economy.

For the second economic indicator, unemployment rate, GDP increases when unemployment rate decreases; GDP decreases when unemployment rate increases. The unemployment rate is determined by the number of unemployed divided by total labor force.

For the final economic indicator, inflation, it is percentage change in overall level of prices from one year to next. There are two causes for it: increase in aggregate demand (demand pull inflation) and decrease in aggregate supply (cost push inflation).

Business-cycle fluctuations in output, employment, and prices are often caused by shifts in aggregate demand. When these shifts in AD decrease rapidly, these lead to recessions; when they increase rapidly, these lead to inflation. We will always go through this constant cycle of peaks and troughs within out economy - that's the way it works.

"Income Price & Determination." Cartoon. AP Government & AP Macroeconomics. N.p., n.d. Web. 14 Apr. 2013. http://www.teresaherrin.com/iii-income-price-determinat/.
Samuelson, Paul A., and William D. Nordhaus. Economics. New York: McGraw-Hill, 1985. Print.