A demand shift can change both output and prices.
A change in consumption, investment, government purchases or net exports shifts AD if it changes planned spending at each general price level. With an unchanged upward-sloping AS curve, an AD increase raises both equilibrium real output and the price level; an AD decrease lowers both. Explain the expenditure mechanism before drawing the shift. The relative changes in output and prices depend on the responsiveness of AS. In limiting horizontal or vertical supply cases, one variable may not change, so always state the model being used.
- AD increase
- With upward-sloping AS unchanged, equilibrium output and the price level rise.
- AD decrease
- With upward-sloping AS unchanged, both output and the price level fall.
- Size depends on AS
- A less responsive supply side produces a smaller output response and greater price pressure for a given AD shift.
Apply the idea
Complete chain
Name the determinant, expenditure component, AD shift, new equilibrium and any important assumption.
No automatic exact multiplier
A horizontal curve shift and the final output change are different objects when prices adjust.
| Change | Other curve | Real output | General price level |
|---|---|---|---|
| AD right | AS unchanged | Rises | Rises |
| AD left | AS unchanged | Falls | Falls |
| AS down/right | AD unchanged | Rises | Falls |
| AS up/left | AD unchanged | Falls | Rises |
Worked example: Why a 30-unit demand shift adds 20 output units
Begin with AD: P = 200 - Y and AS: P = 50 + 0.5Y. An increase in demand changes AD to P = 230 - Y. AS is unchanged.
- Initially the curves meet at Y = 100, P = 100.
- The new intersection solves 230 - Y = 50 + 0.5Y. Rearranging gives 180 = 1.5Y, so Y = 120. Substitute into AD: P = 230 - 120 = 110.
- The demand shift is 30 output-index units horizontally at each price, but equilibrium output rises by only 20 because the price level also rises along AS.
- This compares equilibrium before and after the shift under the model's assumptions. It does not show each step of the adjustment or establish an exact expenditure multiplier for an actual economy.
Watch out for this
A horizontal AD shift of 30 guarantees equilibrium output rises by 30.
With upward-sloping AS, some adjustment occurs through the price level. Read the new intersection.
Check your understanding
With upward-sloping AS unchanged, what follows from a fall in AD?
- Lower equilibrium real output and a lower price level.
- Higher output and a lower price level.
- Higher output and a higher price level.