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Aggregate Supply

Aggregate supply is the total amount of goods and services that firms in an economy are willing to sell at a given price level. There are two reasons why aggregate supply may increase with price level: 1) higher profits motivate firms to expand output by utilizing currently unemployed capital equipment, and 2) as output rises more production processes encounter bottlenecks, requiring price increases to justify further output increases. Aggregate supply can be categorized as short-run, long-run, or medium-run based on which production factors are fixed or variable.

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77 views2 pages

Aggregate Supply

Aggregate supply is the total amount of goods and services that firms in an economy are willing to sell at a given price level. There are two reasons why aggregate supply may increase with price level: 1) higher profits motivate firms to expand output by utilizing currently unemployed capital equipment, and 2) as output rises more production processes encounter bottlenecks, requiring price increases to justify further output increases. Aggregate supply can be categorized as short-run, long-run, or medium-run based on which production factors are fixed or variable.

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NipunSahrawat
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In economics, aggregate 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 to sell at a given price level in an economy.
[citation needed]

Contents
[hide]
1 Analysis
2 Different scopes
3 See also
4 References
5 External links
Analysis[edit]
There are two main reasons why Q
s
might rise as P rises, i.e., why the AS curve is upward
sloping:

aggregate supply is usually inadequate to supply ample opportunity. Usually this is
fixed capital equipment. The AS curve is drawn given some nominal variable, such as the
nominal wage rate. In the short run, the nominal wage rate is taken as fixed. Thus,
rising P implies higher profits that justify expansion of output. In the neoclassical long run, on
the other hand, the nominal wage rate varies with economic conditions. (High unemployment
leads to falling nominal wages -- and vice-versa.)
An alternative model starts with the notion that any economy involves a large number of
heterogeneous types of inputs, including both fixed capital equipment and labor. Both main
types of inputs can be unemployed. The upward-sloping AS curve arises because (1) some
nominal input prices are fixed in the short run (as in the neoclassical theory) and (2) as
output rises, more and more production processes encounter bottlenecks. At low levels of
demand, there are large numbers of production processes that do not use their fixed capital
equipment fully. Thus, production can be increased without much in the way of diminishing
returns and the average price level need not rise much (if at all) to justify increased
production. The AS curve is flat. On the other hand, when demand is high, few production
processes have unemployed fixed inputs. Thus, bottlenecks are general. Any increase in
demand and production induces increases in prices. Thus, the AS curve is steep or vertical.
AS is targeted by government "supply side policies" which are meant to increase productivity
efficiency and national output. Some examples of supply side policies include: education and
training, research and development, supporting small/medium entrepreneurs, decreasing
household and business taxes, making labor market reforms, and investing on infrastructure.
Different scopes[edit]
There are generally three forms of aggregate supply (AS). They are:
1. Short run aggregate supply (SRAS) During the short-run, firms possess one fixed
factor of production (usually capital). This does not however prevent outward shifts in the
SRAS curve, which will result in increased output/real GDP at a given price. Therefore, a
positive correlation between price level and output is shown by the SRAS curve.
2. Long run aggregate supply (LRAS) Over the long run, only capital, labour, and
technology affect the LRAS in the macroeconomic model because at this point
everything in the economy is assumed to be used optimally. In most situations, the
LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown
as perfectly vertical, reflecting economists' belief that changes in aggregate demand
(AD) have an only temporary change on the economy's total output.
3. Medium run aggregate supply (MRAS) As an interim between SRAS and LRAS, the
MRAS form slopes upward and reflects when capital as well as labor can change. More
specifically, the Medium run aggregate supply is like this for three theoretical reasons,
namely the Sticky-Wage Theory, the Sticky-Price Theory and the Misperception Theory.
When graphing an aggregate supply and demand model, the MRAS is generally
graphed after aggregate demand (AD), SRAS, and LRAS have been graphed, and then
placed so that the equilibria occur at the same point. The MRAS curve is affected by
capital, labor, technology, and wage rate.
In a standard aggregate supply demand model, the output (Y) is the x axis and price (P) is the y
axis. An increase in aggregate demand shifts the AD curve rightward, bringing the equilibrium
point horizontally along the SRAS until it reaches the new AD. This point is the short run
equilibrium.

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