Aggregate supply refers to the total supply of goods and services that firms in an economy will sell at a specified price level and time. Analysts plot short-term and long-term aggregate supply curves, with the latter being a vertical line. Input costs and economic growth can shift the curves to the right or left.
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 specified price level and at a time. An aggregate supply curve graphs these relationships. A dot chart uses the x-axis to represent the aggregate supply of products and uses the y-axis to represent price levels.
Analysts plot two types of aggregate supply curves, a short-term curve and a long-term curve. In the short term, increases in the price level will stimulate production due to the increased income that producers can earn for their products. In the long run, the increase in prices that producers receive for their final products is fully offset by the proportional increase in costs that sellers pay for raw materials, labor, and capital inputs.
The short-run aggregate supply curve depicts the supply status of the economy only from a time immediately after a rise in the price level has occurred to the point at which input costs have risen to the same degree. Increases in the price level of final products produce increases in the cost of living for suppliers of inputs and services. An increase in the cost of living encourages suppliers to raise prices for their goods and services. Wages and interest rates also tend to rise. This fall in general price level increases does not occur immediately; therefore, sellers of final products initially enjoy greater profitability as output increases, producing short-run aggregate supply curves that slope upward and to the right.
A long-run aggregate supply curve describes the economy’s supply status after input costs are reset to adapt to rising prices and rising costs 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 an equilibrium point in aggregate supply. The long-run aggregate supply curve is a vertical line, located at the supply point on the horizontal axis where the economy is fully utilizing all available resources.
Two main factors shift the short-term and long-term curves to the right or left on the x-axis. The first is a change in input costs. Increasing entry costs shifts the curves to the left, reflecting lower levels of total supply at a given price, while decreasing entry costs shifts the curves to the right. For example, if the price of oil increases due to new government excise taxes, many end product producers that use oil or oil products will reduce their production levels at all price levels due to higher costs.
Economic growth is an additional item that changes the aggregate supply curve. Positive economic growth results from investment, innovation and the increase of valuable resources such as labor and capital. Economic growth will adjust the curves to the right, reflecting higher supplies at prevailing price levels. Likewise, negative economic growth, due to increased taxes, technological changes and decreased investment and spending, causes the LAS curve to shift to the left. Stagflation, represented by this shift to the left, is an economic recession in which falling levels of production accompany inflationary prices.
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