On a Macro-Economic scale, the supply side determines how much goods and services the economy can produce, while the demand side determines the actual output.The "Supply side" and the "Demand side" interaction play a great role in the economy.
Supply is the amount of a good that producers are willing to make and sell in the market. In general, the higher the price of a good, the more producers will want to make. Producers usually do not want to make goods that are selling at relatively low costs. .
Demand is the quantity of a good that people want to buy. In general, the higher the price of a good, the less people will want to buy it. The opposite is also true. The lower the price of a good, the more people will want to buy it.
The supply side determines how much goods and services the economy can produce. This is measured by productivity (or output per worker) and capacity (the potential total output).
The demand side is the total actual output of the economy. The level of total spending on good and services in the economy is called "aggregate demand". .
If aggregate demand is weak, the total output will be below full potential, unemployment will be high and recession or depression may occur. If aggregate demand is increased to a level where the amount demanded and the amount supplied is equal, then it is said to be at "equilibrium". At this state both output and employment will be at higher levels. If aggregate demand is too high, output will not be able to keep up with the demand and inflation will occur because the prices will begin to rise rapidly.
The key to a balanced economy is for the demand and supply sides to be at an equal level.
Aggregate demand is divided in four categories (as G.D.P.): Consumption spending, Investment spending, Government spending and Net exports (exports minus the imports). The largest component in the Investment category (where businesses belong) is business spending on capital goods which is about 10-12 percent of the GDP.
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