Question

Why does the explanation for the inverse relationship between the price level and quantity demanded depicted by the aggregate demand curve differ from the relationship between price and quantity demanded depicted by a demand curve for a specific good?

Answer 1

Answer:

Demand curve for individual goods is drawn on assumption that price changes for one good and others remain constant. But for Aggregate demand considers change in price level of multiple goods and services.

Explanation:

When considering demand curve of individual goods there is inverse relationship between price and quantity demanded of a good. The price change is pertaining to one good and the assumption is that all other good's prices remains constant and also that income level remains constant. As the price of a good Y rises quantity demanded for that good falls.

On the other hand considering aggregate demand, it looks at changes in price level. This cuts across various goods and also change in income level. So there is no assumption of price of some products being constant in aggregate demand curve. It however assumes supply of money by the government is constant.

The inverse relationship of price to quantity demanded (downward sloping curve) is affected by wealth effect, interest rate effect, and net exports effect.