Considering a situation in affirm where the sales team is not able to achieve their targets and the inventory also fall below their expectations. At this phase, the production in the firm increases but they increase a little price as well, at some point. In the same way, when the unwanted inventory is realized to be piled up in the warehouse, the production decreases also the drop in the price is also realized.
By now, we have discussed the consequences of firm in macroeconomic situation when the production level changes as per the requirement of sales, but the consequences of the price change is still unfolded. Talking about individual firms, when they change their prices, one can notice the change in the level of economy’s price too.
Let’s consider AS-AD model that helps in determining the price level as well as real GDP simultaneously. But before we go any further, we need to find a connection between aggregate expenditure model (that we discussed in the same chapter) and AS-AD model (previous chapter) in order to understand the adjustments in aggregate demand. We can find the connection by distinction between two following factors:
- Distinction concerning aggregate demand and aggregate expenditure
- Relative distinction between aggregate demand curve and expenditure curve