Aggregate Supply Curve

Definition

The aggregate supply curve represents the relationship between the overall quantity of goods and services supplied in an economy and the general price level. It shows how the total supply of all goods and services in an economy responds to changes in the overall price level.

5 Must Know Facts For Your Next Test

1. The aggregate supply curve is typically upward-sloping, reflecting the law of supply, which states that as the price level rises, the quantity supplied increases.
2. The slope of the aggregate supply curve depends on the degree of flexibility in wages and prices, with a steeper slope indicating less flexibility.
3. In the short run, the aggregate supply curve is flatter than in the long run, as firms can more easily adjust their production levels in response to changes in the price level.
4. Factors that can shift the aggregate supply curve include changes in input prices, changes in productivity, and changes in government policies or regulations.
5. The intersection of the aggregate demand and aggregate supply curves determines the equilibrium price level and the equilibrium level of output in the economy.

Review Questions

• Explain the relationship between the aggregate supply curve and the law of supply.
  • The aggregate supply curve is typically upward-sloping, reflecting the law of supply. This means that as the price level rises, the quantity of goods and services supplied in the economy increases. Firms are willing to produce and sell more at higher price levels because it becomes more profitable for them to do so. The upward-sloping aggregate supply curve captures this positive relationship between the price level and the quantity of output supplied in the economy.
• Describe the differences between the short-run and long-run aggregate supply curves.
  • The short-run aggregate supply curve reflects the relationship between the price level and the quantity of output supplied when at least one factor of production is fixed. In the short run, firms can more easily adjust their production levels in response to changes in the price level, leading to a flatter slope of the short-run aggregate supply curve. In contrast, the long-run aggregate supply curve reflects the relationship between the price level and the quantity of output supplied when all factors of production can be varied. The long-run aggregate supply curve is typically steeper, as firms have more flexibility to adjust their production processes and input mix in the long run.
• Analyze how changes in various factors can shift the aggregate supply curve.
  • The aggregate supply curve can shift due to changes in several factors, including input prices, productivity, and government policies or regulations. For example, an increase in the price of a key input, such as oil, would shift the aggregate supply curve to the left, as firms would be willing to produce and sell less at each price level. Conversely, an increase in productivity would shift the aggregate supply curve to the right, as firms would be able to produce and sell more at each price level. Changes in government policies, such as tax or regulatory changes, can also affect the position of the aggregate supply curve by altering the cost structure or production capabilities of firms in the economy.

Related terms

Aggregate Supply: The total quantity of goods and services that firms in the economy are willing to sell at different price levels during a specific time period.

Short-Run Aggregate Supply Curve: The aggregate supply curve that shows the relationship between the price level and the quantity of output supplied in the short run, when at least one factor of production is fixed.

Long-Run Aggregate Supply Curve: The aggregate supply curve that shows the relationship between the price level and the quantity of output supplied in the long run, when all factors of production can be varied.