Aggregate supply

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Aggregate Supply measures the volume of all goods and services being supplied within a countries economy at a given aggregate price level. Typically a relationship between the aggegrate supply and the price level is a positive relationship. Therefore, a rise in price level is an indication for a business to increase output/expand production as the costs or production will remain the same allowing companies to produce more for this higher price. This is to make sure the business reaches the level demanded by the economy. Real output is taking into account the amount of goods and services produced in an economy, minus the rate of inflation at a given time.

1 Short Run Aggregate Supply
2 Supply Side Policies
- 2.1 Change in Quality
- 2.2 Change in Quantity
3 Long Run Aggregate Supply
4 Links
5 Contributors

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Short Run Aggregate Supply

Short Run Aggregate Supply is illustrated above.

The diagram above shows the shift from AS1 to AS2. This shift shows there is an increase in aggregate supply at each price level. This increase is due to a increase in the quality or quantity of one of the factors of production. For example, improvement in technology and productivity or an increase in active labour force. Supply side policies are a very important government tool for increases national income.

The fall in supply at each price level is shown in the inward shift from AS1 to AS3. The cause is a decrease in quality or quantity of one of the factors of production. For example, higher unit wage costs, a fall in capital investment spending or a decline in the labour force.

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Supply Side Policies

Shift in the AS (Aggregate Supply) curve can be caused by the following factors. All these examples represent shifts to the right in the AS curve:

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Change in Quality

Capital - Improvements in technology
Enterprise - Courses to help entrepreneurs
Land - Better fertilisers and land management
Labour - Better training and education

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Change in Quantity

Capital - More factories and machines (Capital goods)
Enterprise - Reduce tax for small businesses
Land - Reclaim land
Labour - Greater immigration levels

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Long Run Aggregate Supply

This is the maximum amount of goods or services that an economy can produce fully utilising the productive resources available. This is determined by the productivity of factor inputs eg; Labour, Land, Capital and Enterprise.

In the long run, price level does not affect aggregate supply and can only be affected by improvements in productivity and by an expansion of the availible factor inputs.

If there is an improvement in productivity or efficiency then the LRAS can be shifted to the right.

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/aggsupply12.gif

The long run aggregate supply curve is likely to shift over time. This is because the quality and quantity of economic resources changes over time, as does the way in which they are combined. These changes bring about changes in the productive potential of an economy. This means there is a shift in the curve to the right.

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/aggsupply13.gif

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/aggsupply21.gif

In the above diagram,when all resources are in use and demand continues, the price inevitably increases. If there is a high demand and a low quantity produced then the price will increase.

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/aggsupply22.gif

In this situation the AS curve has become inelastic. The economy is not able to produce any more goods/services so as demand increases the price level will rise but the national output cannot, so remains the same.

http://www.revisionguru.co.uk/graphics/diagrams/economics/unit3/aggsupply23.gif

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