Aggregate demand can be described as the total amount of goods and services demanded in the economy at a specific time and in a given overall price level. It describes a relationship between the levels of prices and the amount of output that any firm produces (Tucker 2011). Aggregate demand is equal to the consumer’s expenditure on goods and services plus the investment spent on by companies on goods, added to the government’s expenditure on goods and services, plus the sum of exports minus imports multiplied by consumer’s expenditures. When the price level of goods or services is high, the aggregate demand gets low; when the price level is low, aggregate demand goes high. Profit margin is the ratio of profitability calculated as net income by revenues or net profits divided by sales. It seeks to evaluate how much earnings a company gets to keep out of every dollar.
The two are essential in ensuring that a firm is profitable enough but may also contradict with each other at times and may lead to problems in increase of investment. The profit margin is very important when doing a comparison of firms in a similar industry. When the profit margin is high, it is an indication that the company has better control over its costs as compared to other competitor companies. A high aggregate demand shows the quality of goods and services demanded in an economy at a given price. It also reveals the total amount that all consumers, businesses and the government spend on goods and services at different prices. The two therefore are important in the firm when used in the right way.
Price rates and aggregate demand can both be a contradiction in the growth of a firm’s investment too. When the aggregate demand curve turns left, then it means that the total quality of goods and services demanded in an economy decrease as the price increases. When the curve turns right, the total quality of goods and services demanded in an economy increase as the price decreases (Tucker 2011). The two are thereby interconnected and any change in one affects the other. If any given firm is not careful, it might result into a crisis.
Tucker, I. B. (2011). Macroeconomics for today. Mason, OH: South-Western Cengage Learning.