Aggregate Supply Basics: How Aggregate Supply Curve Works

Aggregate supply is the total amount of goods all the companies in a given market or nation sell over a specific period of time. When you depict it on a graph, the aggregate supply curve displays the total output in terms of GDP (gross domestic product) relative to different price levels. In the short term, you’re likely to see aggregate supply growing slowly as a slightly sloping line. In the long-term, however, it often turns into an almost completely vertical line.

Various factors influence aggregate supply. Fiscal policy as set by a nation’s politicians and monetary policy as set by its central banks have a large bearing on how much aggregate supply can increase in a given period. Changes in the labor force, the availability of raw materials, inflation, technological progress, and so on can also have an effect.

Aggregate supply represents the level of output companies provide to a national or global market, whereas aggregate demand indicates the amount of demand from consumers for this output.

Economists use the Aggregate Demand-Aggregate Supply (or AD-AS) model to depict how both factors influence economic growth and the economy as a whole. There’s an intimate connection between both aggregate supply and demand, as one can influence the other due to how they affect the fluctuations in input price levels.

Aggregate supply is the quantity of goods available within a national economy in relation to price levels and GDP. For a more thorough look at what makes aggregate supply what it is, consider these five essential elements:

1. 1. Correlation to price levels: Aggregate supply has a positive relationship to aggregate price levels. As prices increase, companies are likely to do everything within their power to ramp up production and supply more goods so they can make as much of a profit as possible. Eventually, supply outpaces demand, bringing price levels down and aggregate supply with them.
2. 2. Less elasticity in the long term: The amount of supply in an economy tends to go up if you graph it out over a sustained period of time. This is due to the fact companies can better respond to various economic needs in the long term than in the short term. Various factors of production influence this, as do other macroeconomic circumstances (e.g., an increase or decrease in interest rates from the Federal Reserve).
3. 3. More elasticity in the short term: The cost of production fluctuates much more often in the short term. Price levels rise and fall often, leading aggregate supply to look more elastic as well. Over time, this trends toward a more consistently positive increase in most cases.
4. 4. Responsiveness to multiple economic factors: Various different economic factors deserve attribution for affecting aggregate supply. Keynesian economists are likely to place more emphasis on things like government spending and subsidies, while those on the supply side of the equation might look more at the effect of taxes on firms. Other extenuating circumstances like exchange rate fluctuations or labor contractions can also have an impact.
5. 5. Upward-sloping curvature: The aggregate supply curve (or AS curve) almost always slopes upward when you graph it out over a long period of time. In contrast, the aggregate demand curve (or AD curve) slopes downward. This is a large part of the reason economies can trend toward equilibrium in most cases.

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