Learn something new every day More Info... by email
Aggregate supply (AS) is an economics term that refers to the complete supply of goods and services that companies in a national economy will sell at a specified price level and point in time. An aggregate supply curve graphically depicts these relationships. A point graph uses the x-axis to represent aggregate supply of products and uses the y-axis to represent price levels.
Analysts plot two types of aggregate supply curves, a short-run curve and a long-run curve. In the short term, price level increases will stimulate production due to increased revenues that producers can get for their products. In the long run, the increase in prices that producers receive for their final products is totally offset by the proportional increase in the costs that sellers pay for raw materials, labor and capital inputs.
The short-run aggregate supply curve describes the supply status of the economy only from a point in time immediately after a price level increase occurs until the point at which the input costs have increased to the same degree. Price level increases for end products produce cost of living increases for vendors of input goods and services. A cost of living increase encourages the vendors to raise the prices of their input goods and services. Wages and interest rates also tend to rise. This fall-out from general price level increases does not happen immediately, so sellers of end-products initially enjoy greater profitability with increasing production, yielding short-run aggregate supply curves that slope upward and to the right.
A long-run aggregate supply curve describes the economy's supply status after input costs have reset to adapt to rising prices and cost of living increases. This effect makes the aggregate supply independent of the price level over the long term. Increases in product price fail to deliver increases in income, creating a steady-state point in the aggregate supply. The long-run aggregate supply curve is a vertical line, located at the supply point on the horizontal axis at which the economy is fully using all of its available resources.
Two main factors will shift the short-run and long-run curves to the right or the left on the x-axis. The first of these is an alteration in input costs. Increasing input costs adjust the curves to the left, reflecting lower total supply levels for a given price, while decreasing input costs shift the curves to the right. For example, if the price of oil increases due to new government excise taxes, many producers of end products that use oil or oil products as inputs will reduce their production levels at all price levels due to higher costs.
Economic growth is an additional item that shifts the aggregate supply curve. Positive economic growth results from investment, innovation, and increasing valuable resources, such as labor and capital. Economic growth will adjust the curves to the right, reflecting higher supplies at the prevailing price levels. Similarly, negative economic growth, due to increasing taxes, technology changes, and decreased investment and spending, causes the LAS curve to shift to the left. Stagflation, represented by this shift to the left, is an economic recession in which falling output levels accompany inflationary prices.