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 the total amount of goods and services that firms are willing to sell at a given price level in an economy.

  • Short run AS

  • Long run AS

Aggregate supply curve

Shows relationship between nation’s overall price level and the quantity of goods and services produce by that nation’s suppliers

There is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand.

The curve is upward sloping in the short run and vertical, or close to vertical, in the long run.

Short-run and long-run macroeconomics equilibrium:

The equilibrium in the short-run is depicted by the intersection of the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SAS) curve. When either AD or SAS shifts, the equilibrium point is changed.

Graph 1: Shift to the right of the AD curve will cause the equilibrium output as well as the price level to increase.

shift to the right of the AD curve will cause the equilibrium output as well as the price level to increase

Shift to the Right of the AD Curve

shift to the right of the AD curve will cause the equilibrium output as well as the price level to increase

Graph 1

Graph 2: If the AD curve were to shift to the left, opposite would be true: output and price level will decrease.

Output and price level will decrease

AD Curve Will Shift to the Left

Output and price level will decrease

Graph 2

Graph 3: A shift to the left in SAS, will cause the price level to rise while equilibrium output will decrease.

Shift to the left in SAS causes the price level to rise while equilibrium output will decrease

Shift to the Left in SAS

Shift to the left in SAS causes the price level to rise while equilibrium output will decrease

Graph 3

Graph 4: Shift to the right of SAS curve, will decrease price level and increase output.

Decrease price level and increase output

Shift to Right in SAS Curve

Decrease price level and increase output

Graph 4

Output level is higher than what is consistent with full employment

For details refer

Watch video lecture on YouTube: Viddeo Tutorial on Aggregate Supply

Youtube Video Tutorial on Aggregate Supply