Aggregate Supply  

Aggregate Supply is the total value of goods and services produced in an economy.

The aggregate supply curve shows the amount of goods that can be produced at different price levels.

When the economy reaches its level of full capacity (full employment - when the economy is on the production possibility frontier) the aggregate supply curve becomes inelastic because, even at higher prices, firms cannot produce more in the short term

In the Long Run Aggregate Supply is determined by

  1. Available Land and raw materials
  2. Quantity and productivity of Labour
  3. Quantity and productivity of Capital
  4. The level of entrepreneurship in the economy.

In the Short Run Aggregate Supply can be affected by

  1. Price of raw materials
  2. price of labour
  3. Levels of tax and subsidies

Diagrams of Aggregate Supply

1. Classical View of Aggregate Supply

as

The classical view sees AS as inelastic in the long term.

2. Keynesian View of Aggregate Supply

as

Keynesians see the Long run aggregate supply as being upwardly sloping. They argue that the economy can be below the full employment level, even in the long run.

Related Essays and Revision Notes