The aggregate supply and demand model is a model that shows what determines the total supply or the total demand of the economy and how the total demand and supply interact at the macroeconomic level.
Aggregate supply is the total amount of production that companies will produce and sell — in other words, real GDP.
Aggregate demand is the total amount spent on household goods and services in an economy.
Let's start by looking at the point where aggregate supply equals aggregate demand — equilibrium. We can find this point in the diagram below; this is where the aggregate supply, AS, and aggregate demand, AD curves intersect, showing the equilibrium level of real GDP and the equilibrium price level in the economy.
At a relatively low price level for production, companies have little incentive to produce, although consumers are willing to purchase a high quantity. As the price level of products increases, aggregate supply increases and aggregate demand falls until the break-even point is reached
