2. Aggregate Demand and Supply

In micro, one market's demand and supply set that market's price. In macro, the lens widens to the whole economy: aggregate demand and aggregate supply — every market's demand and every firm's supply summed — set the price level and total output together. The curves look like their micro cousins, but the reasons they slope are entirely different.

• Why Aggregate Demand Slopes Down — In micro, demand curves slope down because buyers switch to the cheaper good. In macro, aggregate demand has nothing to switch to. All prices move together instead. When the whole price level falls, the 💰 money in your wallet buys more. Feeling richer, people spend more. Interest rates also fall, so borrowing gets cheaper. 🧑 Foreigners buy more of our goods too. Together, these three paths raise spending. When the central bank prints more money, the whole curve itself shifts right. For example, imagine every price at the corner 🏪 shop drops to half overnight. Your allowance stays the same, but it now buys twice as many 🍬 candies. You and your classmates all buy more than before. Nobody switched shops — every wallet simply got twice as fat.
• After the Shock — In micro, a supply curve is drawn along costs. In macro, short-run supply hangs on the prices people expected. When prices turn out higher than expected, 🏪 shops happily produce more. Once expectations catch up, output returns to its normal place. A demand shock ends up raising only prices over time. A supply shock, like pricier 🛢️ oil, cuts output and raises prices together. As the shock fades, the economy slowly finds its way back. For example, a snack bar 🧑 owner expects plates to sell at 3,000 won and stocks up for a normal week. A festival suddenly floods the shop, so the owner cooks late into the night. Next year the owner plans for higher prices from the start, and output is back to normal. After the busy spell, only the higher prices remain.