Aggregate supply is the total supply of goods and services produced by an economy at a given overall price level in a given period of time. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing and able to produce. The AS curve slopes upward because as prices increase, firms have an incentive to produce more output in order to take advantage of higher prices. The AS curve is also sometimes referred to as the “supply side” of the economy because it represents the willingness and ability of firms to produce goods and services.
There are two main types of aggregate supply: short-run aggregate supply and long-run aggregate supply. Short-run aggregate supply is determined by the availability of resources and the level of technology in the economy. Long-run aggregate supply is determined by the economy’s productive capacity, which is the amount of output that can be produced when all factors of production are being used efficiently.
In the short run, firms can respond to increased demand by using existing resources and technology to produce more output. This type of aggregate supply is referred to as “extensive” because it involves using more of what is already available. In the long run, firms can expand their production facilities and hire additional workers in order to increase output. This type of aggregate supply is referred to as “intensive” because it requires investment in new resources and technology.
The AS curve typically shifts to the right when there is an increase in aggregate demand, which leads to higher prices and increased output. The AS curve can also shift to the right due to an increase in the productivity of workers or an improvement in technology. A shift to the left occurs when there is a decrease in aggregate demand, which leads to lower prices and decreased output. The AS curve can also shift to the left due to a decrease in the productivity of workers or a deterioration in technology.
In the long run, the AS curve is determined by the economy’s productive capacity and it is not possible for aggregate supply to exceed this level. If aggregate demand increases beyond the economy’s productive capacity, firms will eventually be unable to meet this demand and inflation will result.