Aggregate supply is the volume of goods and services produced within the economy at a given price level. It indicates the ability of an economy to produce goods and services and shows the relationship between the real GDP and the average price levels .
The SRAS curve is upward sloping because at a higher price level, producers are willing to supply more because they can earn more profits.
Movement along the AS curve is caused by changes in the price level, and can be contractionary (decrease in price level) or expansionary (increase in price level)
SRAS curve :
P1 to P2 : expansionary
P1 to P3 : contractionary
Long run aggregate supply (LRAS): The maximum amount that firms will produce when all factors of production have been fully employed. This means that there is no spare capacity available. LRAS represents full employment output.
LRAS Curve :
Short Run Aggregate Supply (SRAS): The quantity of goods and services supplied over a short period of time with some factors of production fixed. In other words, it refers to the current state of the economy where some inputs cannot change quickly.
SRAS Curve is the graph that shows the relationship between the price of a good and the quantity demanded.
The short run is the period of time when at least one factor of production is
fixed, whilst in the long run all factors of production are variable.
Aggregate supply is the volume of goods and services produced within the economy at a given price level
It indicates the ability of an economy to produce goods and services
Shows the relationship between real GDP and average price levels
In the short run, to increase production, businesses may increase the hours of work their employees do
Firms may opt for temporary workers, overtime, or incentives like bonuses to increase production
Even if basic wage rates stay the same, both the average and marginal cost of labor per good produced will rise
The short-run AS curve is likely to be elastic, meaning output is relatively responsive to a change in price
A change in price level leads to a movement along the curve, while a shift is caused by other factors
Factors influencing short-run AS:
Changes in costs of raw materials and energy can shift the SRAS curve
Changes in exchange rates can affect SRAS, with a weaker pound leading to decreased production costs
Changes in tax rates can impact the cost of production and shift the SRAS curve
Supply side shocks occur when there are significant changes in these factors
In the long run, there is a limit on how much supply can be increased due to fixed factors of production
Unlike the short run, wage rates are variable in the long run
Different shapes of long-run AS curve:
Classical view: AS is independent of the price level and determined by factors of production and technology
Keynesian view: LRAS curve is not always vertical due to sticky wages and other factors affecting employment and output
Technological advances, changes in productivity, education, government regulations, demographic changes, and competition policy can influence long-run AS