See
also: List of Economic Topics 
Aggregate
supply
In economics, aggregate supply is the total supply of
goods and services by a national economy during a specific time period. There
are at least two different versions of this concept in Keynesian economics.
1.
Sometimes the "Z curve" in the "Keynesian cross" diagram is
referred to as "aggregate supply." This curve often represents the total
amount of production that corresponds to the total amount of income in a country
during a specific time period. Because the sum of all income received corresponds
to the sum of all production, this is drawn as a 45 degree line. In this diagram,
the desired total spending line crosses this Z curve, determining the equilibrium
level of production, income, and spending.
2.
In neo-Keynesian theory seen in many textbooks, an "aggregate supply and
demand" diagram is drawn that looks like a typical Marshallian supply and
demand diagram. The aggregate supply (AS) curve is usually drawn as upward-sloping
in the short run, since the quantity of aggregate production supplied (Qs) rises
as the average price level (P) rises.
There
are two main reasons why Qs might rise as P rises, i.e., why the AS curve is upward
sloping:
A.
In neoclassical-influenced textbooks, it is necessary to raise prices to motivate
profit-seeking firms to increase output. This is because of diminishing returns
and thus rising marginal costs that arise because one or more of the inputs or
factors of production does not change in the short run and is assumed to be fully
employed at all times. Usually this is fixed capital equipment. The AS curve is
drawn given some nominal variable, such as the nominal wage rate.
In
the short run, the nominal wage rate is taken as fixed. Thus, rising P implies
higher profits that justify expansion of output. In the neoclassical long run,
on the other hand, the nominal wage rate varies with economic conditions. (High
unemployment leads to falling nominal wages -- and vice-versa.) This is used to
justify a vertical aggregate supply curve in the long run.
B.
An alternative model starts with the notion that any economy involves a large
number of heterogeneous types of inputs, including both fixed capital equipment
and labor. Both main types of inputs can be unemployed. The upward-sloping AS
curve arises because (1) some nominal input prices are fixed in the short run
(as in the neoclassical theory) and (2) as output rises, more and more production
processes encounter bottlenecks.
At
low levels of demand, there are large numbers of production processes that do
not use their fixed capital equipment fully. Thus, production can be increased
without much in the way of diminishing returns and the average price level need
not rise much (if at all) to justify increased production. The AS curve is flat.
On
the other hand, when demand is high, few production processes have unemployed
fixed inputs. Thus, bottlenecks are general. Any increase in demand and production
induces increases in prices. Thus, the AS curve is steep or vertical.
This
implies an AS curve which has the shape of a rounded backwards "L".
Aggregate
Supply Fundamentals The aggregate quantity of goods and services supplied depends
on three factors:
Economics,
Banking & Finance
