Thursday, May 24, 2012

Aggregate Demand

If everyone has exactly what they need and want - if everyone could look into the Mirror of Erised and see themselves exactly as they are - economic activity would cease.

Conversely, if nobody had anything, then nobody could afford to purchase anything, and economic activity would similarly cease.

Each of these is an example of lack of aggregate demand, in the first case, because nobody wanted anything, and in the second, because nobody could afford to buy anything. Demand requires both the desire to purchase something and the means to do so.

Unless you are a strict practitioner of the Chicago faith, you probably understand that depressions represent failures of aggregate demand. It might occur to you that there is at least one more way that aggregate demand would fail - when you have a population consisting partly of class 1 and the rest of class 2. But that would take us on a different journey.