AGGREGATE SUPPLY
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Definition of Aggregate Supply:
In economics, aggregate supply or domestic final supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy.
Examples: If the aggregate supply increase includes an increase in population, increased physical capital stock, and technological progress and then the aggregate supply determines the extent to which the aggregate demand increases the output and prices of a good or service.
Including this:
Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period.
How does Aggregate Supply affect the growth economy?
-The aggregate supply curve depicts the quantity of real GDP that is supplied by the economy at different price levels.
- Increases in the price level will increase the price that producers can get for their products and thus induce more output.
To address this issue, it has become customary to distinguish between two types of aggregate supply curves, the short‐run aggregate supply curve, and the long‐run aggregate supply curve.
- The long-run aggregate supply curve is shifted by any transition in the economy that changes the normal rate of production
- The shifts can be classified according to the different factors that influence output in the classical model.
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•Labor
•Capital
•Natural Resources
•Technological Knowledge
Changes in the environment that can cause shifts:
•Labor
•Capital
•Natural Resources
•Technological Knowledge
Why the Long-Run Aggregate-Supply Curve Might Shift?
Inflationary pressure in Aggregate supply
- The greatest spikes in inflation in the US economy over the 20th century. For example, coincided with the wartime booms. Inflation rates, on the other hand, tend to fall during recessions.
Two ways, according to the AS framework.
When the economy is already at or near potential GDP and full employment, one possible cause is if aggregate demand begins to move the right, moving the macroeconomic equilibrium into the steep portion of the aggregate supply curve
Inflationary pressures manifest themselves in variety of ways, such as
This situation can cause the aggregate supply curve to shift back to the left.An increase in input costs affects many or all companies around the economy. Perhaps an important input to output such as oil and labor.
Long-run aggregate supply curve**
- The long-run aggregate supply describes the economy's supply schedule in the long-run.
- The long-run is known as the period when input prices have completely adjusted to changes in the price level of final goods.
Short-run aggregate supply curve
- The short-run aggregate supply or SAS curve is provided a valid description of the supply schedule of the economy only in the short-run.
- Short-run is the division of time that begins immediately after an increase in the price level and that ends when input prices have increased in the same volume to the increase in the price level.
In the long run, the increase in prices that sellers receive for their final goods is completely balanced the proportional increase in the prices that sellers pay for inputs.