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• Single market demand curves are controlled by relative prices, whereas aggregate demand curves respond to general price levels. We are accustomed to downward sloping demand curves. At higher prices, the quantity demanded of a product is going to be less than at lower prices. But remember, the law of demand is based on relative prices. For instance, an increase in the price of coca-cola raises its price relative to its substitute, Pepsi, so consumers will switch their purchases from Coca-cola to cheaper substitutes like Pepsi. Aggregate demand curves, however, reveal how aggregate demand responds to changes in the GENERAL PRICE LEVEL...
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Common topics in this essay:
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