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The main idea of using this aggregate supply – aggregate demand modelis to get a better understanding of price level and real GDP. In this chapter, we will come to know about the regulatory way of achieving both and the methods by which they interact. The idea related to this model is similar to those models explaining about price and quantity for controlling competitive market. However, application of this AS – AD model does not stand equivalent to that of competitive market model.

There are certain differences between both of these models. This is because the former model is entirely based on an imaginary market structure but has services and goods as per real GDP. In fact, in this market, price and quantity are of real GDP and level of price is measured with the help of GDP deflector.

An important point that this competitive market modelhelps us understand with aggregate supply – aggregate demand modelis its relationship and the difference between 2 aspects. They are:

  • Supply
  • Quantity that is supplied

The first step to getting a clear comprehension is with real GDP which is supplied.