Understanding how movements along the AD and AS curves occur is central to macroeconomic analysis. These shifts reflect changes in the general price level, not underlying conditions.

Aggregate Demand and Price Level Changes

The aggregate demand (AD) curve shows the relationship between the overall price level and the total quantity of goods and services demanded. It is downward sloping due to three key effects:

• The real balances effect: higher prices reduce the real value of money, lowering consumption.

• The interest rate effect: rising prices increase demand for money, raising interest rates and discouraging investment.

• The net exports effect: higher domestic prices reduce competitiveness abroad, decreasing exports and increasing imports.

Movements Along the AD Curve

A movement along the AD curve happens when the price level changes, but all other factors remain constant.

• A rise in the price level leads to a contraction in AD (a movement up the curve).

• A fall in the price level leads to an expansion in AD (a movement down the curve).

This diagram depicts the aggregate demand and aggregate supply curves, showing how a change in the price level leads to a movement along the AD and AS curves, affecting equilibrium output and price levels. Source

This is different from a shift in the AD curve, which results from changes in components of AD such as consumption, investment, government spending, or net exports.

Aggregate Supply and Price Level Changes

The aggregate supply (AS) curve illustrates the relationship between the general price level and the quantity of goods and services firms are willing to supply.

Short-Run Aggregate Supply (SRAS)

In the short run, the AS curve is upward sloping. Higher prices encourage firms to increase output because:

• Wages and input costs are relatively sticky.

• Higher prices allow for higher revenues and profits.

A movement along the SRAS curve occurs when the price level changes, holding other factors such as wages, productivity, and taxation constant.

• Rising prices cause an expansion in output along the SRAS.

• Falling prices cause a contraction in output along the SRAS.

Long-Run Aggregate Supply (LRAS)

The LRAS is vertical at full employment output, reflecting the economy’s maximum sustainable level of production. Movements along the LRAS are not meaningful because in the long run, output is determined by productive capacity, not the price level.

Distinguishing Movements from Shifts

Students often confuse movements along curves with shifts of curves. The distinction is crucial for accurate analysis.

This illustration contrasts shifts of demand or supply curves with movements along them, emphasizing that price changes cause movements along the curves, while other factors cause shifts. Source

• Movements along curves: Caused by price level changes.

• Shifts of curves: Caused by changes in non-price factors (e.g., productivity, fiscal policy, investment).

For clarity:

• If prices change → movement.

• If determinants of AD or AS change → shift.

The Role of Equilibrium in Movements

Equilibrium in the macroeconomy occurs where AD intersects AS. A movement along either curve, caused by a change in price level, alters the equilibrium position.

Example of AD Movements

• When prices rise, movement up the AD curve leads to lower equilibrium real output and higher equilibrium prices (demand contracts).

• When prices fall, movement down the AD curve increases equilibrium real output and lowers equilibrium prices (demand expands).

Example of SRAS Movements

• If prices rise, movement along the SRAS leads to higher output as firms increase production in response to greater profit opportunities.

• If prices fall, firms cut production due to reduced profitability.

Factors Ensuring Only Price-Level Movements

To analyse movements correctly, all non-price determinants must be assumed constant:

• In AD: income levels, consumer confidence, government policies, and global trade conditions are unchanged.

• In SRAS: wages, productivity, taxation, and raw material costs are unchanged.

This assumption allows economists to isolate the pure effect of price changes on output levels.

Graphical Representation in Analysis

When illustrating this in diagrams:

• A price level change is shown as a movement along the existing AD or AS curve.

• A shift would require drawing a new AD or AS curve to the left or right.

Students should practice carefully labelling axes:

• Vertical axis: general price level.

• Horizontal axis: real GDP (output).

Importance in A-Level Economics

Recognising movements along AD and AS curves is vital because:

• It underpins accurate analysis of inflationary and deflationary changes.

• It helps explain why output fluctuates when price levels change.

• It supports understanding of how policies affect equilibrium in the short run versus the long run.

In exams, students are expected to:

• Clearly distinguish between movements and shifts.

• Correctly use diagrams to demonstrate changes in equilibrium output and prices.

• Accurately link movements to broader macroeconomic contexts, such as inflationary pressures or recessionary gaps.