How Do You Read an AD/AS Diagram?

Read an AD/AS diagram by checking the axes, finding where the curves meet, then seeing how a shift changes the economy’s real output and average price level.

Spec focus: Cambridge International AS Level Economics, Aggregate Demand and Aggregate Supply analysis: equilibrium (4.3.11), shifts and their effects (4.3.12), curve shapes (4.3.8), and movements along curves versus shifts (4.3.10).

Start with the axes and curves

The vertical axis shows the average price level; the horizontal axis shows real output (output adjusted for price changes). Aggregate demand, or AD, is total spending on an economy’s goods and services at different price levels. Aggregate supply, or AS, is the output firms are willing to produce at different price levels.

The AD curve slopes downwards. Short-run aggregate supply, or SRAS, slopes upwards: as the price level rises, firms may be willing to produce more in the short run. Long-run aggregate supply, or LRAS, shows the economy’s productive capacity. You may see LRAS drawn as a vertical line or as a curve with three sections.

Find equilibrium, then read the change

Where AD meets SRAS is the short-run equilibrium. Read across to the vertical axis for the price level and down to the horizontal axis for real output.

Suppose AD shifts right while SRAS stays unchanged. The new intersection is usually higher and further right: the price level rises and real output increases. If SRAS shifts left while AD stays unchanged, the price level rises but real output falls. Always identify which curve shifted before stating the effects.

Common mistake: a change in the price level alone is a movement along an existing AD or AS curve, not a shift of that curve. A shift means the amount demanded or supplied changes at each price level. Do not assume that an increase in real output must also increase the economy’s long-run productive capacity.