Aggregate supply

What is Aggregate Supply?

The total amount that producers in a whole economy are willing and able to supply at a given price level in a given time

Aggregate Supply Graph

Impacts of Price Level

Higher prices will encourage businesses to employ more workers, increase output and purchase more supplies

AS in Short Term

The relationship between planned national output and the general price level.

AS in Long Term

The relationship between potential national output and the general price level

LRAS Graph

Why is LRAS this shape

LRAS depends on available resources: capital, enterprise and technological developments. Not related to Price Level.

Equilibrium output

When AS and AD curves are put together it shows the AS/AD equilibrium in the economy. Any shifts have impact on real GDP

Causes of shifts in Aggregate supply

• Wages of workers to produce output

• Price of raw materials

• Energy Costs

• Tax

• Supply Shocks

Keynesian LRAS Graph

Keynesian Range (Spare capacity)

Increase Demand & Employment to increase Output & GDP, no impact on price level

Intermediate Range (Approaching full capacity)

There is a trade-off where there can be more output however there is also higher prices. Must accept inflation for growth

Classical Range (full capacity)

LRAS curve becomes vertical as price level has no impact on total output.

How can the LRAS curve be moved outwards

• Increase productivity

• Invest in education

• Invest in tech

• Increase govt spending on capital goods