Economics Textbooks Boundless Economics Aggregate Demand and Supply Aggregate Supply
Economics Textbooks Boundless Economics Aggregate Demand and Supply
Economics Textbooks Boundless Economics
Economics Textbooks
Economics
Concept Version 6
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Introducing Aggregate Supply

Aggregate supply is the total supply of goods and services that firms in a national economy plan to sell during a specific time period.

Learning Objective

  • Define Aggregate Supply

Key Points

    • Aggregate supply is the relationship between the price level and the production of the economy.
    • In the short-run, the aggregate supply is graphed as an upward sloping curve.
    • The short-run aggregate supply equation is: Y = Y* + α(P-Pe). In the equation, Y is the production of the economy, Y* is the natural level of production of the economy, the coefficient α is always greater than 0, P is the price level, and Pe is the expected price level from consumers.
    • In the long-run, the aggregate supply is graphed vertically on the supply curve.
    • The equation used to determine the long-run aggregate supply is: Y = Y*. In the equation, Y is the production of the economy and Y* is the natural level of production of the economy.

Terms

  • output

    Production; quantity produced, created, or completed.

  • factor of production

    A resource employed to produce goods and services, such as labor, land, and capital.

Full Text

Aggregate Supply

In economics, aggregate supply is the total supply of goods and services that firms in a national economy plan to sell during a specific time period. It is the total amount of goods and services that the firms are willing to sell at a given price level in the economy. Aggregate supply is the relationship between the price level and the production of the economy .

Aggregate Supply

Aggregate supply is the total quantity of goods and services supplied at a given price. Its intersection with aggregate demand determines the equilibrium quantity supplied and price.

Short-run Aggregate Supply

In the short-run, the aggregate supply is graphed as an upward sloping curve. The equation used to determine the short-run aggregate supply is: Y = Y* + α(P-Pe). In the equation, Y is the production of the economy, Y* is the natural level of production of the economy, the coefficient α is always greater than 0, P is the price level, and Pe is the expected price level from consumers.

The short-run aggregate supply curve is upward sloping because the quantity supplied increases when the price rises. In the short-run, firms have one fixed factor of production (usually capital). When the curve shifts outward the output and real GDP increase at a given price. As a result, there is a positive correlation between the price level and output, which is shown on the short-run aggregate supply curve.

Long-run Aggregate Supply

In the long-run, the aggregate supply is graphed vertically on the supply curve. The equation used to determine the long-run aggregate supply is: Y = Y*. In the equation, Y is the production of the economy and Y* is the natural level of production of the economy.

The long-run aggregate supply curve is vertical which reflects economists' beliefs that changes in the aggregate demand only temporarily change the economy's total output. In the long-run, only capital, labor, and technology affect aggregate supply because everything in the economy is assumed to be used optimally. The long-run aggregate supply curve is static because it is the slowest aggregate supply curve.

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