Aggregate supply refers to the total supply of goods and services that firms in a national economy will sell at a specific price level and on time. There are two types of aggregate supply curves, short-run and long-run, which are affected by input costs and economic growth. The long-run curve is a vertical line, while the short-run curve slopes up and down.
Aggregate supply (AS) is an economic term that refers to the complete supply of goods and services that firms in a national economy will sell at a specific price level and on time. An aggregate supply curve graphically illustrates these relationships. A dot chart uses the x-axis to represent aggregate product supply and uses the y-axis to represent price tiers.
Analysts plot two types of aggregate supply curves, a short-run curve and a long-run curve. In the short term, increases in the price level will stimulate production due to the increased revenue producers can get for their products. In the long run, the increase in prices producers receive for their final products is fully offset by the proportional increase in costs sellers pay for raw materials, labor and capital inputs.
The short-run aggregate supply curve only describes the supply state of the economy from immediately following an increase in the price level to the point where input costs have increased to the same level. Increases in the price level for final products produce increases in the cost of living for suppliers of input goods and services. An increase in the cost of living encourages sellers to raise the prices of their input goods and services. Wages and interest rates also tend to rise. This fall from increases in the general price level does not occur immediately, so sellers of final products enjoy higher profitability initially as output increases, producing short-term aggregate supply curves that slope up and down. right.
A long-run aggregate supply curve describes the state of economic supply after input costs have been reset to adjust for rising prices and rising cost of living. This effect makes aggregate supply independent of the price level in the long run. Product price increases fail to generate increases in income, creating a point of stability in aggregate supply. The long-term aggregate supply curve is a vertical line, located at the supply point on the horizontal axis where the economy is fully exploiting all available resources.
Two main factors will shift the short-run and long-run curves to the right or left on the x-axis. The first of these is an alteration of input costs. Increasing input costs adjust curves to the left, reflecting lower total supply levels for a given price, while decreasing input costs shift curves to the right. For example, if the price of oil rises due to new government excise taxes, many producers of end products that use oil or petroleum products as inputs will reduce their production levels at all price levels due to higher costs.
Economic growth is an additional element that shifts the aggregate supply curve. Positive economic growth comes from investment, innovation and an increase in valuable resources, such as labor and capital. Economic growth will smooth right-hand curves, reflecting higher supplies at prevailing price levels. Similarly, negative economic growth, due to increased taxes, technological changes, and reduced investment and spending, shifts the LAS curve to the left. Stagflation, represented by this leftward shift, is an economic downturn in which falling production levels accompany inflationary prices.
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