Understanding Aggregate Supply

Aggregate supply defines the sum of all services and goods available at every price point within a specific national economy throughout a defined period of time. This includes exported and imported goods. You may also hear it called the total output of an economy.

The supply is affected by the supply side performance of the total economic situation. It is a reflection of the economy’s productive capacity and the costs involved in production in each sector of the overall economy.

Since aggregate supply measures the total volume of services and goods that can be produced within an economy, there is a positive relationship between AS and overall prices. Rising prices are a sign for companies to increase production in order to meet a higher level of aggregate demand, and that increase in demand normally leads to a commensurate increase in the supply as well.

Among the factors which can play a role in aggregate supply shifts are:

  • New technologies
  • Changes in the number of people available for employment and their level of skill
  • Expectations relating to inflation – anticipated rises in inflation can increase wages
  • The costs of raw goods and wages
  • Differences in investment trends
  • Changes in productivity – new factories opening or old ones shutting down

There is a direct connection between aggregate supply and aggregate demand. The demand drives the supply and visa versa. Economists look at aggregate supply in both the short and long term. During the short term it is expected that prices and productivity will remain relatively constant whereas long term forecasts are more likely to be predictions of potential.

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