- Aggregate supply
economics, aggregate supply is the total supply of goods and services produced by a national economy during a specific time period. There are at least three different versions of this concept.
1. Sometimes the "Z curve" in the "Keynesian cross" diagram is referred to as "aggregate supply." This curve often represents the total amount of production that corresponds to the total amount of income in a country during a specific time period. Because the sum of all income received corresponds to the sum of all production, this is drawn as a 45 degree line. In this diagram, the desired total spending line crosses this Z curve, determining the equilibrium level of production, income, and spending.sap
2. In neo-Keynesian theory seen in many textbooks, an "aggregate supply and demand" diagram is drawn that looks like a typical Marshallian
supply and demanddiagram. The aggregate supply (AS) curve is usually drawn as upward-sloping in the short run, since the quantity of aggregate production supplied (Qs) rises as the average price level (P) rises.
There are two main reasons why Qs might rise as P rises, i.e., why the AS curve is upward sloping:
A. In neoclassical-influenced textbooks, it is necessary to raise prices to motivate profit-seeking firms to increase output. This is because of
diminishing returnsand thus rising marginal costs that arise because one or more of the inputs or factors of productiondoes not change in the short run and is assumed to be fully employed at all times. Usually this is fixed capitalequipment. The AS curve is drawn given some nominal variable, such as the nominal wage rate.
In the "short run", the nominal wage rate is taken as fixed. Thus, rising P implies higher profits that justify expansion of output. In the neoclassical "long run", on the other hand, the nominal wage rate varies with economic conditions. (High unemployment leads to falling nominal wages -- and vice-versa.) This is used to justify a "vertical" aggregate supply curve in the long run.
B. An alternative model starts with the notion that any economy involves a large number of heterogeneous types of inputs, including both fixed capital equipment and labor. Both main types of inputs can be unemployed. The upward-sloping AS curve arises because (1) some nominal input prices are fixed in the short run (as in the neoclassical theory) and (2) as output rises, more and more production processes encounter
At low levels of demand, there are large numbers of production processes that do not use their fixed capital equipment fully. Thus, production can be increased without much in the way of diminishing returns and the average price level need not rise much (if at all) to justify increased production. The AS curve is flat.
On the other hand, when demand is high, few production processes have unemployed fixed inputs. Thus, bottlenecks are general. Any increase in demand and production induces increases in prices. Thus, the AS curve is steep or vertical.
This implies an AS curve which has the shape of a rounded backwards "L".
AS is targeted by government "supply side policies" which are meant to increase productivity efficiency and national output. For example, Education and Training, Research and Development, Breaking Trade Union Powers, Benefits Reform, Welfare Reform, Labour Market Reform.
There are generally three forms of aggregate supply (AS). They are:
#Short run aggregate supply (SRAS) - Within the time frame during which firms can change the amount of labor used but not capital (such as building new factories). This form demonstrates what happens to the economy under the most slack, when resources are underused. Upward shifts in SRAS generally increase output (y) but don't increase price (P). The SRAS curve is nearly perfectly horizontal. The concept is that wages (price of labor) don't change over the short run.
#Long run aggregate supply (LRAS) - Over the long run, only capital, labor, and technology affect the LRAS in the macroeconomic model because at this point everything in the economy is assumed to be used optimally. In most situations, the LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output.
#Medium run aggregate supply (MRAS) - As an interim between SRAS and LRAS, the MRAS form slopes upward and reflects when capital as well as labor can change. When graphing an aggregate supply and demand model, the MRAS is generally graphed after aggregate demand (AD), SRAS, and LRAS have been graphed, and then placed so that the equilibria occur at the same point. The MRAS curve is affected by capital, labor, technology, and wage rate.
In a standard aggregate supply demand model, the output (y) is the x axis and price (P) is the y axis. An increase in aggregate demand shifts the AD curve rightward, bringing the equilibrium point horizontally along the SRAS until it reaches the new AD. This point is the short run equilibrium.
There is no one single MRAS curve; rather, it comprises an infinite number of curves that progress from the SRAS curve to the LRAS curve. We can create MRAS curves for showing things more clearly. Sometimes, we skip the SRAS equilibrium altogether and go directly along an MRAS curve; the new equilibrium is where the AD and MRAS curve intersect: the medium-run equilibrium.
Finally, the long run equilibrium is at the intersection of the AD and LRAS curves. Generally, an arrow is used to indicate the progression of the equilibrium from short-run, to medium-run, to long-run positions.
List of economics topics
* Elmer G. Wiens: [http://www.egwald.ca/macroeconomics/keynesian.php Classical & Keynesian AD-AS Model] - An on-line, interactive model of the Canadian Economy.
* [http://www.columbia.edu/dlc/wp/econ/vickrey.html Nobelpricewinner Prof. William Vickrey: 15 fatal fallacies of financial fundamentalism-A Disquisition on Demand Side Economics]
Wikimedia Foundation. 2010.
Look at other dictionaries:
Aggregate Supply — The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of… … Investment dictionary
aggregate supply — /ˌægrɪgət sə plaɪ/ noun all goods and services on the market ● Is aggregate supply meeting aggregate demand? … Marketing dictionary in english
aggregate supply — /ˌægrɪgət sə plaɪ/ noun all goods and services on the market ● Is aggregate supply meeting aggregate demand? … Dictionary of banking and finance
aggregate supply — The total supply of all the goods and services in an economy. J. M. Keynes made aggregate demand the focus of macroeconomics; however, since the 1970s many economists have questioned the importance of aggregate demand in determining the health of … Big dictionary of business and management
Aggregate Supply — Total supply of goods and services in the economy available to meet aggregate demand. The supply consists of domestically produced goods and imports … Financial and business terms
aggregate supply — total supply of goods and services in a national economy that can be used to satisfy aggregate demand … English contemporary dictionary
aggregate supply — Econ the total of all goods and services produced in an economy … The ultimate business dictionary
Lucas aggregate supply function — The Lucas aggregate supply function or Lucas surprise supply function, based on the Lucas imperfect information model, is a representation of aggregate supply based on the work of new classical economist Robert Lucas. The model states that… … Wikipedia
Supply-side economics — is an arguably heterodox school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates … Wikipedia
Aggregate demand — This article is about a concept in macroeconomics. For microeconomic demand aggregated over consumers, see Demand curve. In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time… … Wikipedia