tejas.gaikwad.1044
Tejas Gaikwad
The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand.
A shift in aggregate supply can be attributed to a number of variables. These include changes in the size and quality of labor, technological innovations, increase in wages, increase in production costs, changes in producer taxes and subsidies, and changes in inflation. In the short run, aggregate supply responds to higher demand (and prices) by bringing more inputs into the production process and increasing utilization of current inputs. In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency.
It is generally assumed that all the good and services produced are sold hence, it can be estimated by the goods and services produced in an economy.
Components of Aggregate supply:-
Consumer goods:-
Private consumer goods and services, such as motor vehicles, computers, clothes and entertainment, are supplied by the private sector, and consumed by households. For a developed economy, this is the single largest component of aggregate supply.
Capital goods:-
Capital goods, such as machinery, equipment, and plant, are supplied to other firms. These investment goods are significant in that their use adds to capacity, and increases the economy’s ability to supply private consumer goods in the future.
Public and merit goods:-
Goods and services produced by private firms for use by central or local government, such as education and healthcare, are also a significant component of aggregate supply. Many private firms such as those in construction, IT and pharmaceuticals, rely on contracts to supply to the public sector.
Traded goods:-
Goods and services for export, such as chemicals, entertainment, and financial services are also a key component of aggregate supply.
The aggregate supply curve may reflect either labor market disequilibrium or labor market equilibrium. In either case, it shows how much output is supplied by firms at various potential price levels. The aggregate supply curve (AS curve) describes for each given price level, the quantity of output the firms plan to supply.
The Keynesian aggregate supply curve shows that the AS curve is significantly horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level during an economic depression. The idea behind that is because there is unemployment, firms can readily obtain as much labor as they want at that current wage and production can increase without any additional costs (e.g. machines are idle which can simply be turned on). Firms' average costs of production therefore are assumed not to change as their output level changes
Shifts of aggregate supply:-
The following exogenous events would shift the short-run aggregate supply curve to the right. As a result, the price level would drop and real GDP would increase:-
a) An exogenous decrease in the wage rate.
b) An increase in the physical capital stock.
c) Technological progress — improvements in our knowledge of how to transform capital and labor into output.
The following events would shift the long-run aggregate supply curve to the right:-
a) An increase in population.
b) An increase in the physical capital stock.
c) Technological progress.
A shift in aggregate supply can be attributed to a number of variables. These include changes in the size and quality of labor, technological innovations, increase in wages, increase in production costs, changes in producer taxes and subsidies, and changes in inflation. In the short run, aggregate supply responds to higher demand (and prices) by bringing more inputs into the production process and increasing utilization of current inputs. In the long run, however, aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency.
It is generally assumed that all the good and services produced are sold hence, it can be estimated by the goods and services produced in an economy.
Components of Aggregate supply:-
Consumer goods:-
Private consumer goods and services, such as motor vehicles, computers, clothes and entertainment, are supplied by the private sector, and consumed by households. For a developed economy, this is the single largest component of aggregate supply.
Capital goods:-
Capital goods, such as machinery, equipment, and plant, are supplied to other firms. These investment goods are significant in that their use adds to capacity, and increases the economy’s ability to supply private consumer goods in the future.
Public and merit goods:-
Goods and services produced by private firms for use by central or local government, such as education and healthcare, are also a significant component of aggregate supply. Many private firms such as those in construction, IT and pharmaceuticals, rely on contracts to supply to the public sector.
Traded goods:-
Goods and services for export, such as chemicals, entertainment, and financial services are also a key component of aggregate supply.
The aggregate supply curve may reflect either labor market disequilibrium or labor market equilibrium. In either case, it shows how much output is supplied by firms at various potential price levels. The aggregate supply curve (AS curve) describes for each given price level, the quantity of output the firms plan to supply.
The Keynesian aggregate supply curve shows that the AS curve is significantly horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level during an economic depression. The idea behind that is because there is unemployment, firms can readily obtain as much labor as they want at that current wage and production can increase without any additional costs (e.g. machines are idle which can simply be turned on). Firms' average costs of production therefore are assumed not to change as their output level changes
Shifts of aggregate supply:-
The following exogenous events would shift the short-run aggregate supply curve to the right. As a result, the price level would drop and real GDP would increase:-
a) An exogenous decrease in the wage rate.
b) An increase in the physical capital stock.
c) Technological progress — improvements in our knowledge of how to transform capital and labor into output.
The following events would shift the long-run aggregate supply curve to the right:-
a) An increase in population.
b) An increase in the physical capital stock.
c) Technological progress.