1.3 Aggregate Supply

• Aggregate supply:

  Total supply of all goods and services produced within an economy at a given overall price at a given time.
• Short run aggregate supply (SRAS):

  Goods and services that firms are willing and able to produce at a given price level in the short run, where at least one factor of production is fixed.
• The relationship between AS and the price level in the short run:

  As the price level increases, do too does the quantity of goods and services produced in the economy.
• Neoclassical approach to aggregate supply:

  Approach to aggregate supply in which there is a short run curve (where output changes with price level) and a long run curve (where output does not change with price level)
• Keynesian approach to aggregate supply:

  Approach to aggregate supply in which there is no distinction between SRAS and LRAS. One AS curve can show both the short and the long run,
• The Keynesian AS curve:

  An aggregate supply curve that has a flat horizontal section, and upward sloping section and a vertical section.

  
• Causes of shifts of AS in the short run:

  1. Changes in wage rates

  2. Changes in raw materials costs

  3. Changes in taxation affecting the profitability of firms

  4. Changes in the productivity of labour or capital

  5. Changes in exchange rates
• The relationship between AS and the price level in the long run:

  Since all the factors of production are in full use on the LRAS curve, it is a vertical line. It does not matter what the price level is, as the quantity of goods and services being produced will always be the same.
• Shifts in LRAS:

  Caused by changes in the quantity and/or quality of the factors of production. Examples include:

  1. Changes in labour supply

  2. Changes in the stock of capital inputs

  4. Improvements in the quality of factor inputs / productivity of inputs​

  5. Advances in the state of technology​

  6. Improvements in the banking system​